Bullish Until Proven Otherwise

May 25, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week had its share of stories, including the decision by the President to scrap the summit with N. Korea, cooling trade talks with China, and potential tariffs on new imported cars.  Instead of talking about these stories as I usually would, I’d like to do something a little different this week.

In the process of bringing you the news each week, I tend to gravitate to the stories that made the most headlines and the stories that have the largest impact on the stock market.  However, these stories often highlight negative news since those are the headlines that are most widely reported.  I mention this because I came across a piece this week that hit a nerve and helped me realize the pervasiveness of negative news can color one’s outlook, maybe even mine.  You see, I read a lot of analyst papers each week and, they all focus on solutions to one risk or another.  To be fair, it is our job to look ahead and parse out the real risks from the perceived risks.  Yet, when one does this day after day, much like watching the evening news, it may seem that there are only bad things happening.  So when I came across this column, it made me aware that perhaps what is needed is a little more balance.  With that, I decided to copy the article in its entirety.  This piece was written by Mitch Zacks from Zacks Investment Management.  Without further ado, here is the piece.

“Successful investing often relies on research, patience, discipline, and smart decision-making. But, there’s another trait that can be helpful – in a word, “optimism.”

The world is full of uncertainty – disease outbreaks, the threat of nuclear war, hyper-partisanship and divisiveness, mounting debt, anemic savings rates, and so on. So, it’s easy to be pessimistic and bearish. But, history suggests it’s better to be bullish until proven otherwise.

For example, in 1950 the Korean War broke out – just five years after the end of World War II. The S&P 500 was up +30.81% that year. In 1963, President Kennedy was assassinated, but the market was up +22.61%. 1975 marked the fall of Vietnam, yet the market soared +37%. In 1993 Congress passed the largest tax increase in history, and the S&P 500 increased +9.97%.

Over time, events occur that result in mass casualties or destruction of businesses or even industries. Yet, stocks manage to battle through the adversity and have continued throughout history to trend higher, reaching new highs in every cycle.

In some cases, gains seem to defy logic. Stocks love to climb a wall of worry and have proven over time that solid, long-term returns come to those who wait. Waiting requires patience and an ever-constructive attitude regarding human potential and the potential for growth in the global economy. It requires optimism.

Since 1998, we’ve endured the Tech Bubble bursting, 9/11, the Iraq War, and the deepest recession since the Great Depression. But, $10,000 invested on January 1, 1998 would have been worth $40,135 by December 29, 2017; a +7.2% annualized gain for the investor patient and optimistic enough to take the long view that the economy would prevail. And, it has.

In the last two decades, an investor whose optimism wavered during the most challenging times could have paid a big price. Selling out of the market in response to the biggest declines – usually to ‘wait it out’ – could have meant sacrificing some of the market’s biggest ‘up’ days. During the 1998 – 2017 time frame mentioned above, 6 out of the 10 best days in the market occurred within two weeks of the 10 worst days. The best day of 2015, for example (August 26) was just two days after the worst day of that year (August 24).  Downside volatility often gives way to “v-shaped” bounces, making steep declines arguably some of the worst opportunities to sell out of stocks.

I’m not calling for interminable, blind optimism. There will be reasons to think and invest defensively. Still, in my view, those who invest in equities for long stretches of time are likely to generate attractive, competitive returns. What it takes, particularly in the face of so many adverse events, is optimism. Channel optimism, see past the small stuff, and realize that stocks and the global economy can overcome what might seem like the biggest challenges.”

In the face of these difficult times, perhaps the author is right.  Perhaps what is needed is a little optimism.  Let me know what you think.

May 25, 2018

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