Climbing the Wall of Worry
Most investors have heard that “bull markets climb the wall of worry”—a phrase that refers to when investors continue to buy even when there’s a little (or a lot) to worry about. And it usually pays off. But how can you tell whether the stock market is in a bull phase that is “climbing the wall,” or whether the fear is justified and a bear market is just around the corner?
I’ve observed over the years that portfolios perform less well when worry and emotion are the guiding forces. (Which is the primary reason it makes sense to seek out an RIA firm to help guide objective investment decisions.) Today’s environment is full of worry. Brexit, interest rates, and the US Presidential Election have investors on edge, and investors are stressed. As a result, it can be difficult to remember this important reality: fear provides the best equity buying opportunity.
In periods of fear, Wall Street strategists have a poor record of recommending equities. They underweighted equities during the entire bull market of the 1980s and 1990s. Then they overweighted equities in the wake of the 2000 technology bubble, just in time for the so-called “lost decade in equities” when US stocks produced a negative return for more than ten years straight. Today is no different. Wall Street strategists are recommending the lowest equity allocation in the 30-year history of the data. And these recommendations are all rooted in fear. They did the same thing during and after The Great Recession (2008-2015). Those who went against the grain and took advantage of the opportunity to buy value-priced equities were handsomely rewarded.
Remember that long-term market trends are driven not by current events, but by the overall economy. From our perspective, the US economy is in pretty good shape looking forward:
The September jobs report includes many positive trends. More people are seeking work, a sign of growing optimism. The number of folks stuck in part-time work shrank as more of them landed full-time work. And the job gains were broad-based, showing up in many industries.
Inflation remains benign and interest rates remain low. However, the Fed has hinted that a small hike in the interest rate of ¼% is likely in December.
New motor vehicle sales are trending downa little to 17 million vehicles a year. However, that level of decline is to be expected after the large increase in sales the last few years.
Wages and personal income are seeing continued growth. This growth is feeding consumer spending, which lies at the core of the US economy. This dynamic is unique to the US. Australia, Brazil, and Canada are commodity-export driven. Russia’s economy is driven primarily by energy exports, and China’s is economy is driven by manufacturing exports.
No political leader has the power to strong-arm their ideas without the approval of Congress. Whatever happens on November 8, that balance of power should keep things in check.
All of these factors point to the fact that the US is in an under-recognized sweet spot right now. Many strategists and investors may be wearing blinders of fear at the moment, but I strongly believe that any short-term pullback in the stock market should be viewed as a buying opportunity—not a reason to run for cover.