Nerds Rally! 4 months after the stock market began recovering from last yr’s carnage, skeptics proceed to multiply.
Doubters in bull markets are continuously on the hunt for bogeymen. There are old standby states: the Fed and its rate of interest hikes, inflation and recession.
There are also some newfangled distractions: Chinese spy balloons, anyone? The noise signals that we’re in fact in the center of an actual bull market.
This is part of a routine behavioral phenomenon I actually have long called the “pessimism of disbelief.” It creates an upward ramp of the bull market – parallel but different from the “wall of worry” that the bull market climbs.
Let me explain.
Bear markets brutalize with depth, length or, as in 2022, the sheer magnitude of fears that get on investors’ nerves.
The resulting scars create a hyper-give attention to the negatives and dismiss the emerging positives as ephemeral or illusory.
This pessimism of disbelief – or PoD for brief – starts with each recent bull market and lasts a couple of third of its full duration. At this point, PoD has infected most investors.
![This pessimism of disbelief – or PoD for short – starts with each new bull market and lasts about a third of its full duration.](https://nypost.com/wp-content/uploads/sites/2/2023/03/NYPICHPDPICT000007589757.jpg?w=1024)
A Bank of America poll shows that two-thirds of fund managers around the globe view the post-October stock rally as a bear market, citing concerns about inflation, geopolitics and recession.
The Eurozone investor expectations survey is similarly dismal.
The weekly survey of the American Association of Individual Investors shows that growth was barely higher, but still well below long-term averages.
The real PoD message is the “Yes, but” objection. Yes, inflation slowed again in January – but lower than in December.
Yes, the economic data looks resilient and stocks are up, but that only brings more inflation and the Fed. Sure, improved supply chains have lowered freight rates, but increased inventory means rising warehousing costs. Yes, China has reopened but oil prices have skyrocketed.
Disbelief is step one of psychological denial and a form of regret. While the classic “wall of worry” is mere pessimism concerning the future, PoD goes a bit further – it’s anchoring in the past and a form of what behaviorists call confirmation bias – outright denial of obvious progress and higher than expected outcomes.
Meanwhile, in this Christmas column, I told you that perfection is not crucial for stocks to grow. They only need a reality that exceeds predetermined expectations. If bad news is not bad enough, stocks go up. This happens in every recent bull market in history.
Do you remember 2020? The stock hit bottom on March 23. Then PoD began.
Most called the following rally a Fed-triggered sugar peak soon to be quelled by recent COVID tightenings, government interference, supply chain chaos or a debt implosion.
Remember the underside of 2009 and the following double-dipping talk, the fear of alt-a mortgage defaults and muni bond liquidations?
Old people like me remember how rising unemployment, the recession and layoffs of automakers kept the spirits alive long after the October 1974 low. Or late 1982 fears of tax hikes and weak profits. Not only did stocks rise in the awful early months of this bull market, they grew.
Since 1925, the S&P 500’s median returns six months after bear market lows at 22.8%.
Twelve months? 38.0%. These early gains are crucial. They construct up over your complete boom period — about five years on average.
Watch out with every “Yes, but” – yours or anyone else’s. Be certain that it’s fresh concerns, not old, overpriced ones.
As an alternative, hearken to the wisdom of market legend Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”