“Sucker’s rally,” pessimists shrieked as stocks in February countered the rebound that began last autumn.
They see downside ahead and urge using the surge off October’s lows to protect against the rest of a brutal bear market with myriad fears bubbling.
“Get out before the next shoe drops,” many counselled.
Sound logical? Beware: if this is truly a new bull market starting — and I think it is — selling early is a huge mistake.
Stocks typically rise far, far further upon stalling after initial bursts, compounding the early gains. Miss that and you miss the juiciest reason to own stocks.
Today, well-worn worries such as inflation, interest rate increases and geopolitical dust-ups such as Iran’s uranium enrichment and Russian “spy ships” abound, fuelling widespread belief that the rally was false.
It is all part of the “Pessimism of Disbelief” I detailed in my column in December.
Stocks pre-price widely touted concerns, moulding them into bricks in the “Wall of Worry” every bull market famously climbs.
As fear upon fear proves overblown, even bad outcomes are bullish — they top expectations of utter doom.
The global inflation saga highlights this phenomenon.
Yes, prices still gallop, especially in the eurozone, where many are fretting about the bloc’s record core inflation.
In the US, overall price rises remain above 6 per cent year over year. Yet inflation’s irregular, post-June downtrend shows former fears of a 1970s repeat that went too far — bullish.
Or take economic growth. Fourth-quarter eurozone gross domestic product grew by a paltry 0.4 per cent annualised. In the US, it rose 2.7 per cent. The UK's GDP was basically flat, up 0.1 per cent annually.
None were blindingly blazing — but both far exceeded dire recession worries. Ditto for China, where slow 2.9 per cent annual growth beat paltry expectations — and that predated Covid-19 restrictions easing.
More recent data echo this. The US purchasing managers indexes (PMI) were mixed in February — not the recession harbingers many feared.
The eurozone manufacturing PMI contracted. But the much larger services gauge signalled expansion.
Overall, business activity across the bloc hit nine-month highs.
China’s official manufacturing PMI also surprised positively, flipping back to growth. Even the PMIs in the much-maligned UK showed a return to private sector growth.
Classic early cycle positive surprises such as these have driven the stock rally since last autumn, with global equities reclaiming about half their bear market slide.
Watch: US Federal Reserve chief warns of 'pain' in reducing inflation
US Federal Reserve chief warns of 'pain' in reducing inflation
US stocks are up a little less from their lows. Eurozone stocks — turbocharged by the bloc’s energy crisis turning out better than feared — are up more at 38 per cent (in US dollars). France and the UK both hit record highs.
Selling now ignores the bull markets’ tendency to overpower bear markets.
Consider the S&P 500 for its longest history: since 1925, US bull markets lasted a median 53 months, nearly tripling bear markets’ 18 months.
Bull and bear market returns contrast starkly: median gains of 158 per cent versus declines of 28 per cent.
The S&P 500’s strong 0.83 correlation with non-US world stocks shows that trend holds globally, given that 1.0 is a lockstep movement and minus 1.0 the polar opposite.
While not predictive, these figures highlight why selling now is so risky for growth-seeking investors.
Why? Compounding! If stocks continue their jagged rise, those initial gains keep compounding throughout the future rise — high-octane portfolio fuel.
This growth on growth is why stocks are such a powerful tool for building long-term wealth. Missed early gains aren’t recovered.
Selling after early bull market bounces raises a risky question: When do you re-enter?
Waiting for scary stories to subside leaves you waiting indefinitely.
Consider 2020. Skies remained cloudy a year after the pandemic lockdown-induced bear market bottomed.
Yet the ensuing bull market brought 103.1 per cent in gains for global stocks, dwarfing the rally since autumn.
That bull market roared amid frenzies of fears: new Covid-19 waves, supply chain chaos and global tourism challenges. They formed the “Wall of Worry” as stocks kept climbing.
Stocks rising through dourness are not a fluke but the foundation of early bull markets.
Recall 2009. The global financial crisis bear market ended on March 9.
Fretting the rally was false — leading to even worse declines — failed, as it should have.
However, world stocks had soared 76.8 per cent by the end of 2009 — and kept roaring.
The global bull market churned higher through Japan’s enormous 2011 earthquake, the eurozone’s sovereign debt crisis, the tumultuous 2016 US election and so much more.
It did not peak until Covid-19 lockdowns shocked markets, with stocks rising 322 per cent in total.
Staying invested through a bear market does not doom portfolios — but doing so and then missing a bull market’s powerful early gains will.
Reality topping bleak expectations tells you we are probably in the midst of those gains now — with much more ahead. Stay bullish.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $160 billion of assets under management