Where's the Love?

One sign that we are in a new bull market, in my opinion, is how excited everyone seems to get whenever the market goes down a bit (like it did on October 1st) or when a bit of disappointing economic news is released (like today’s employment report). It is as if people don’t really believe that the stock market rally, which started in March, is real. This has led to an uncomfortable feeling by many investors that hovers awkwardly over the triangle whose corners are marked by “fear”, “hope” and “despair.” Because of the massive hit investor wealth has experienced (although we would note that the market is only down 8% from this time last year!), investors fear that all the recent gains could be somehow wiped out in an instance. They hope things will get better, but so much of the commentary aired in the media focuses on huge, potentially negative imponderables such as the U.S. government budget deficit, the weak U.S. dollar, inflation, etc., that this hope easy turns to despair whenever we hit a patch of bad news.

To me, this bruised and confused investor psyche is actually a positive thing. It suggests that investors have learned from past experiences, and that they are not quickly embracing risk assets just because they might go up. The fact that investors are carefully weighing their feelings about risk and reward is a very healthy development. Part of the whole sub-prime fiasco was due to investors not accurately measuring risk (why is that AAA-rated mortgage bond yielding more than other AAA-rated bonds?), and the consequences which followed taught us all a lot about the risk/reward continuum.

Indeed, this is a rally which is hard to love. But then, most bull markets begin in the detritus of a recession. They are hatched under the cold light of dimmed expectations and loss. They are nurtured by fragile and tottering economies. They appear truly healthy and strong and receive universal adoration by the masses only when they are near the end of their run. Yes, bull markets usually end only when the most conservative investor places his last farthing into that “can’t fail” spec trade or the person so close to retirement “finally” shifts all of her 401k money into small cap growth funds.

Early bull markets aren’t meant to be loved. Because we can’t truly be sure what they are, it is normal to fear them a bit. Those who can accept the risk inherent in the young bull should be rewarded more than those who wait “for the dust to clear.” I believe that focusing on the big picture (the big three positives – growing earnings, low interest rates and bearish sentiment) is really the best way to invest right now. The occasional bad day in the market or disappointing economic data point may be enough to cause a lump in the throat, but not enough to force a course change.