A bull market is in full swing – and most of us are in denial


Friday rally! Four months after the stock market’s recovery from last year’s carnage began, skeptics still abound.

Skeptics of bull markets constantly prey on brokers. There are the old standbys: the Fed and its rate hikes, inflation and recession.

There are also some new-fangled illusions: Chinese spy balloons, anyone? Noise signal We are in fact, in the middle of a real bull market.

This is part of a routine behavioral phenomenon that I have long called “the pessimism of disbelief.” This makes bull markets’ very ramp to the top – parallel but distinct from the “wall of worry” that bull markets climb.

Let me explain.

Bear markets act brutally with the depth, length, or, as in 2022, the magnitude of fears gnawing at investors’ nerves.

The resulting scars create a hyperfocus on the negatives and dismiss the emerging positives as temporary or illusory.

This pessimism of disbelief – or PoD for short – begins with each new bull market, lasting about a third of its entire duration. At this juncture, PoD has impressed most investors.

This pessimism of disbelief – or PoD for short – begins with each new bull market, lasting about a third of its entire duration.
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A Bank of America survey found that two-thirds of global fund managers see stocks’ post-October rally as a bear market rally, citing fears of a slowdown from inflation to geopolitics.

A survey of Eurozone investor expectations is similar.

The American Association of Individual Investors’ weekly poll shows some gains, but still well below the long-term average.

The real telling of the POD is the “yes, but” objection. Yes, inflation slowed again in January – but less than in December.

Yes, the economic data looks resilient and stocks rise, but that only brings more inflation and the Fed. Sure, improved supply chains cooled freight rates, but increased inventory means increased warehouse costs. Yes, China reopened, but it’s pushing oil prices sky high.

Disbelief is the first step in psychological denial and a form of grief. While the classic “wall of worry” is simple pessimism about the future, POD goes a little further – it’s an anchoring in the past and a form of behavioral confirmation bias – a clear denial of obvious progress and better-than-expected outcomes.

Meanwhile, in this column on Christmas Day, I told you that perfection is not necessary for rising stocks. They need reality to exceed pre-priced expectations. If the bad news isn’t bad enough, stocks rise. Every new bull market happens.

Remember 2020? At the bottom of the stock on March 23rd. Then the POD started.

Most attributed the next rally to a Fed-driven sugar high that would soon be hit by a new Covid outbreak, government intervention, supply-chain chaos or the impact of debt.

Remember the 2009 bottom and the impending double-dip talk, fear of Alt-A mortgage defaults and muni bond wipeouts?

Old-timers like me remember when rising unemployment, recession and automaker layoffs after the October 1974 low led to deep discouragement. Or concerns about tax increases and weak profits in late 1982. Stocks didn’t just rise in the gloomy early months of those bull markets — they soared.

Since 1925, the average S&P 500 has returned 22.8% six months after a bear market low.

Twelve months? 38.0%. Those early benefits are important. They compound over the life of a bull market — five years on average.

Beware of any “yes, buts” – yours or someone else’s. Make sure it’s about fresh concerns and not rehashing old, pre-existing issues.

Instead, heed the wisdom of market legend Sir John Templeton: “Bull markets are born on pessimism, thrive on skepticism, mature on optimism and die on euphoria.”

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