Why People Hate Rising Stocks

Cullen Roche over at Pragmatic Capitalism.com on why people hate rising stock prices.  {Green Highlights are mine.  Blue Highlights are Cullen's.}

"There’s a general disdain for rising market prices.  Why?  Because, the odds are, you aren’t participating in all of the gains.  There’s some sad math behind the reality of the stock market and that math says we all can’t benefit from the market’s rises.  You see, all securities issued are always held by SOMEONE.  The market, in the aggregate, is the market.  And we don’t all have all of our chips in the stock market, because, by definition, we can’t.  When I buy stocks someone else sells their stocks.  Again, all securities issued are always held by someone.  And the fact that someone owns stocks means someone else doesn’t own stocks.

So, when stock prices go up there’s an inevitable sense of opportunity loss (by someone).  You feel like you’re missing out on gains you could have potentially been a part of.  You feel like you’re falling behind.  This is a perfectly common reaction, but it’s also totally unreasonable and almost certainly misguided.  Why?  Because we don’t really have to be involved in all of the markets gains all of the time.  What we really need our money to do for us is outperform potential purchasing power loss and protect us from the risk of permanent loss in a manner that is consistent with our risk tolerances and portfolio needs.  That is, we need to create SAVINGS portfolios that create a sense of certainty and protection in what is really a savings account (not an investment account)."

I grew up in a farming community and I can tell you that most investors are like farmers.  If you ever ask a farmer how things are going, it's always bad.  It's either too dry or too wet, prices are too low etc.  Most investors, particularly investment pundits take the same approach.  It makes sense if you think about it.  Preach that stock prices can go higher and when a correction {or worse a bear market} arrives you look silly.  Always discussing a list of concerns, either real or imagined, makes you look prescient when stocks stage an inevitable decline.  The problem for most in this always bearish crowd is what do you do when things go up?  Stocks have faced a whole litany of terrors over the past four years.  On several occasions those concerns have led to very high volatility and furious market declines in excess of 10% in very short periods of time.  Yet stock prices have recaptured most of their 2008-09 declines and most of this crowd has been wrong all the way higher.  

Stocks should have been clocked last year given all the concerns, yet we finished with double digit gains.  Most of last year's problems have not left us.  Europe still has issues, there is a big question mark about corporate earnings this year, sequestration is still on the table in Washington, Africa and the Middle-East are still powder kegs and something is going between Japan and China.  With all of this known stock prices are still up about 5% for the year and up double digits since our election.  Even at current valuation levels, barring an absolute collapse in corporate earnings, stocks are not over valued.  They are however overbought which could lead to a correction of some sort at any time.  But the reason I think we've advance, the reason I think we've continued to climb the proverbial "Wall of Worry" is that despite all these concerns things continue to get better.  

To be fair there are some well known voices on Wall Street that are currently quite negative on the markets.  Doug Kass and Byron Wien are two prominent investors who have repeatedly voiced their concerns about where we are in the markets right now.  {If you click on their names you can see what they have most recently said about stocks.  Hint-It's not positive.}  Both Kass and Wien are well respected for thoughtful and fair analysis so their comments should not be dismissed out of hand.   They may ultimately be shown to be correct.  But that still does not erase the fact that stocks have booked nice returns so far this year.  In fact if stock prices were to do nothing but trade sideways  from these levels for the rest of the year when you add in dividends the total return would be about the yearly average return for stocks.  

Now in regards to market corrections go here to see what I've said in the past about market seasonality.  With that regard I'll also say that I'd be pretty willing to take a bet that we see some sort of correction this year and when it comes it will likely be greater than 10%.  That's just what markets do as they cycle between periods of being overbought and oversold.  It would not surprise me if we see a change in market sentiment soon.  I'd think it is more likely that change comes later this winter or early in the spring.  The problem is that I don't know if that correction comes from here or from some level higher.  Certainly it's hard to put a lot of new money to work right now given how much we've risen and as I've stated above we are very over bought.  We have the defensive pages of the playbook nearby in case things change.  Related to being a bit more defensive, foreign indices are rolling over and it is very possible that we will soon lower our shortest term indicator given how far markets have risen in the past few months.

All that being said a correction is a normal and healthy thing for stocks as it flushes the system of weak hands and generally weeds out exuberance.  Provided that correction doesn't portray a change of trend, something that given current statistics doesn't seem likely and provided we don't have an exogenous event wash over the gunnels then my perspective is given what we know today a correction would mean at some point stocks are better to buy, especially if you have a longer term perspective over the next 12-18 months.

Link:  Why Do People Hate Rising Stock Prices