Rearview Mirror Investiing

Overly bearish investors are focusing too much on what was wrong with the economy, and are failing to look ahead. Economic data have been getting worse for eight, nine months, even years by some measures, like housing data. This is not news.

What is news is the fact that the stock market has had one of its biggest three-month rallies of all time since the March lows, and there are tons of people who almost blindly assume that the market now has to go lower. This is a common reaction to rising stock prices after a major bear market. But such persistent bearishness in the face of rising stock prices is an emotional response, not an entirely rational one. The emotional wounds inflicted by last year's vicious market declines will be slow to heal. Such declines have only been seen or approached three other times since 1929, and each time the market rebounded, it took many years to get back to the previous highs. In fact, some investors exited stocks during these bear markets never to return. We've probably all heard the stories of people who, in the 1950's, proudly boasted having significant amounts of their net worth in cash in order to avoid another impending crash. By the mid-1950's, after 25 years since the crash of 1929, the market had still not reached its old highs...yet it had rallied seven-fold from its lows reached in 1932. An historic opportunity, missed by those who were looking in the rearview mirror.

By no means is the economy in great shape right now. All the talk of "green shoots" is about enough to make one sick. However, the market has risen over 40% from its March low for some reason, and those reasons were by no means apparent when the market was selling off to its lows the first two months of the year. Likewise, now it is not apparent what catalysts will drive the market lower or continue to push it higher in the months ahead. Investing is a game of allocating money with incomplete information, and once we admit that we do not know how the market will react to future data, or even what that data will be, then we can get down to making money.

What matters right now is that the market is going up. There are still problems in the economy that may come home to roost later this year and next (consumer credit, commercial real estate, future inflation), so we must avoid becoming pollyannas. However, it is irrelevant whether I or you or any individual thinks the market will go up, down, or sideways, because the market itself is much more powerful than any of us individually. So we must understand what the market is saying. We may conjecture that the reasons for the rally are increased liquidity, attractive valuations, performance chasing, a bottoming in the economy, growth in the emerging markets, or whatever other "glass-half-full” arguments we can come up with. What we cannot argue about, however, is the price itself.

The current uptrend from the March lows is likely to continue, and all dips are likely to be bought. Once the uptrend is broken, and in time it will be broken, the pundits can dust off those bearish arguments once again. For now, the market continues to rally and the trend remains up.