Mon, JAN 18th, 2016
Happy Martin Luther King Day!
This snippet was shared with me last week:
“The Bearish Argument
This is actually a Jared Dillian quote; I did not steal this from anybody: ‘The bearish argument is always most compelling on the lows.’
Stated another way, the bearish argument sounds the smartest.
The commodity bears sound pretty smart. They are right! Great.
When the turn happens, they will be wrong.
In other words, there is zero probability they will suddenly just have a change of heart and get bullish on commodities right on the lows.”
I would add to this that the bearish argument tends to “sound the smartest” because it’s most often contrarian (i.e., equity markets rise ~73% of the time going back to the early-1920). It’s this whole idea that the bear “sees” something that the mindless Pollyannas are missing. And yet the cruel reality is if one were consistently bearish (i.e., they always sound “smart”) one would have missed +7-10% returns per year in stocks over the past ~95 years. Not smart.
My take is that being bearish post-crisis (2007-09) is still vogue and resonates with most people in today’s environment because the scars from this fat-tailed event are still fresh. It was a deep and protracted recession (worst in 70+ years), and it deeply impacted everyone’s psyche. As a result, most have now made it a habit to attempt to predict and dodge the next “big punch.” Academic studies on behavioral finance support this thesis. This lack of conviction and its pervasive presence – a recent analysis found that the word “crisis” was printed in the NYT over 7,000 times in 2015 vs. ~100 times 10 years ago – I take as a bullish sign for stocks (though, the volatility during the drawdown can be stressful).
As the late, great Barton Biggs once quipped: “A bull market is like sex. It feels best just before it ends.” This is a funnier way of saying that bull markets die on euphoria, not skepticism or fear (an idea often attributed to John Templeton). There is little-to-no euphoria permeating through the stock market today; nor has there really been any the entire way up since March 2009. This has truly been one of the most hated bull markets in history. But as I’ve said in the past, this should be good for the overall health of the stock market.
Jason L. Ware, MBA / Chief Investment Officer
Albion Financial Group
*Images from Barron’s Magazine