Market Psychology or The Wall Of Worry

The bull market is not over.  It is not over because most people don't even think we are in one. 

The crushing market reversal of 2000-2001 is a huge anchor holding down the market.  Investors with a historical bent point out, correctly, that the Dow and S&P are just about where they were six years ago.  And the NASDAQ is still below water. 

On top of that fact, pessimistic investors throw in such show stoppers as

-high oil prices

-Iran and Iraq

-A recession (haven't had one of those for awhile so guess we are due)

-the weak dollar

-inverted yield curve

-inflation and/or deflation

-a new Fed chief

-over inflated real estate prices

-GM and pensions and medical costs

So the market should go down because there are a lot of things to worry about.  Guess what, there are always a lot of things to worry about and, in the past, a lot more worrisome things than those things listed above. 

But let's look at a few just for fun.  The stock market being just where it was six years ago.  The market may be right where it was but the economy is not.  Six years ago, PE's were through the roof and IPO's were making investment bankers rich and investors poor, or soon to be poor.  Today, PE's are down, companies have strong balance sheets, and tons of cash laying around burning a hole in the pockets of management.  The stock market was overvalued in 2000 and probably undervalued today. 

Iran and Iraq and high oil prices--so what else is new?  What's going to happen?  I don't know but the world is already aware of these events and it is fairly safe to assume that any concerns are already priced into the market.  This meaning that any downside events (bad news) probably won't impact the market much as the market assumes any news coming out of these places will be bad and has adjusted accordingly.  Any good news would help the market.

A recession?  Maybe, maybe not.  But probably not this year so a non-starter to the market.

The perennial weak dollar.  Here's the news.  The dollar is up, not down. 

Inverted yield curve which means short term rates are higher than long term rates.  They're not.  But not by much so perhaps something to be concerned about but since I don't really understand this arguement, I will make it a neutral to the market. 

Inflation and/or deflation--when you get one, people worry.  When you get the other, people worry.    When inflation goes up, that is bad.  When prices go down, like in Japan, that is bad because it slows the economy.  In regard to inflation, the Fed is doing something about it by hiking interest rates which is the traditional weapon for contolling inflation.  And believe me, we are not Japan.  Japan has no population growth and they save so their economy tanked.  Everybody, even terrorists, want to live here so our population is growing due to immigration.  And we spend.  We spend a lot.  So I don't see a Japan scenario for this country.

A new Fed chief?  The new boss looks pretty much like the old boss.

GM and pension costs?  In the 1950's a GM CEO testified in a Congressional hearing that "What is good for GM is good for America."  And, boy, did he catch it for that.  And he was right.  Now he would be wrong.  America does not revolve around GM.  GM is a dinosaur waiting to expire.  The impact will be significant (especially if you are a UAW member) but not earth shaking.

But the main reason the bull market will not end is because, again, people don't think we are in one.  Bubbles need enthusiasm and wacky prices.  I don't see that now.  But if somebody starts saying "This time it's different." head toward the exits.  That's what people were saying to justify the market in 2000.  Like I said, I don't hear it now.

Comments

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[Mike Landfair]

"companies have strong balance sheets"
Have you checked out GE's website: As a result of GE's restatement of its financial information in its amended 2004 Form 10-K dated May 6, 2005, readers should no longer rely on our previously filed financial statements and other financial information for the years and for each of the quarters in the years 2004, 2003, 2002 and 2001. Readers should also no longer rely on our previously announced results for the first quarter of 2005.

Then you say "The dollar is up, not down."
What you had is a mini rally in a bear market from 80 to 91, after a fall from 120 to 80, Big deal! Now it appears to be rolling over. I won't even bother to critique the rest of your points.
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[Chris Yeh]

The two areas where I do hear, "this time it's different" are consumer Internet companies, and housing prices in certain over-inflated markets.

Bears watching (pun intended).

[NCN]

This is just the kind of post that I like to read. Seriously: Informative, well-written, personal...
Great, great post. I'm linking to it NOW...
Keep it up,
NCN