While I can offer up a number of reasons—both fundamental and technical—why we might expect the recent rally to hold, I can counter (if not more than counter) each with a reason why we shouldn’t. In fact, even if the odds were overwhelmingly in favor of the market taking flight to all-time highs from here, I would encourage you not to expect it. Why? Simply because that within the expecting generally lies desire. The expecting, that is, of something deemed favorable: I.e., you expect your stocks will soon be rising in price, which would be a desirable near-term outcome.
You see, the greatest single threat to successful long-term investing lies between the ears of the investor. “Recency bias”—the belief that what’s occurring now will continue—plagues the grey matter of both the naive investor as well as those who ought to know better (like the execs of copper miner Freeport-McMoRan who borrowed billions to expand into the oil market when the price was $100+ per barrel. Needless to say, their shareholders have suffered for it). In the context of a huge 3-day rally in stocks, we can call it “recency hope”. And when market hopes are dashed, individual investors often react. I.e., they tend to offer up their shares to those who understand that it’s best to attend the auction when buyers are feeling stingy. I.e., reluctant buyers equal lower prices.
Even if you’re not prone to selling when prices are falling, suffering from “recency hope” not only sets you up for disappointment, it suggests that you somehow believe that a declining market is a bad thing. Well, unequivocally, it’s not!
Yes, falling stock prices, for patient buyers and unflappable holders, are always and forever good things! So how can that be? Well, of course I’ve no need to explain on behalf of buyers, but for holders I can do this metaphorically: Think in terms of weed-pulling, underbrush-burning, pruning, fertilizing, raining, snowing, and plain old resting. Yep, you got it, market selloffs are rejuvenating phenomena. True investors (owners, as opposed to traders, of stocks) understand that, and, frankly, they appreciate—and never react to—corrections and bear markets, despite the attendant impact on the numbers printed on their monthly account statements.
Into the weeds:
It forever amazes me how so many “experts” can review the same data and forecast vastly different outcomes. I listened to two well-credentialed analysts yesterday, one has us on the verge of, if not already in, a recession, while the other says recession isn’t even on the foreseeable horizon. The former cites credit spreads and commodity prices, the latter cites employment numbers, restaurant sales and housing. In last week’s update I sympathized, more or less, with the latter—and this week’s data only serves to bolster that case: Of the 15 indicators released, 9 beat analysts’ expectations, 4 came in below, and 2 were in line. Of the 4 disappointments there was the NAHB Housing Index (measures builder optimism), which came in at 58 versus a 60 estimate (although above 50 denotes overall optimism), housing starts (although permits beat, which sets up better starts numbers going forward), continuing jobless claims (although initial claims beat) and the Empire State Manufacturing Index (yes, manufacturing remains weak, although other indicators have shown recent signs of life).
Friday’s market action was interesting, in that the Dow and the S&P 500 ended flat, and the Nasdaq Comp saw a nice .4% gain, while oil plunged 3% and the Core CPI number for January came in at a hot 3.6% annual pace. I read the Fed’s economic assessment from their January meeting minutes, and while I get why the market has discounted virtually no March rate increase—and I believe that remains firm—given the quality of much of the data released since that meeting I suspect that the futures market will be upping the odds of a hike or two later this year. The fact that stocks didn’t give way to that thinking on Friday is, again, interesting. Could it be that good news is actually good news? We’ll see… it’s way too soon to tell.
I’ll let you off easy this week and close here with a look at the technicals (click the icon in the lower right corner for full screen. It then takes a few seconds to focus):