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A really stupid reason to be bearish...

(PLUS: Don't Fear the Reaper by Blue Oyster Cult [Video] - that incredible stock market soothsayer below)

It's just one of those soundbites we have to accept hearing over and over, as if it makes any sense:

"The stock market is up over 200% in this bull market so it HAS to go down"

The stock market can go up and down for many reasons - earnings, interest rates, geopolitics, market mechanics, investor psychology; too many reasons to write in this space. And sometimes we aren't sure of the exact reason behind market movements until well after the fact. But there are reasons and often, there is more than just one reason.

My top 10 reasons why this statement exposes the charlatans who say it:
  1. It implies that everyone made 200% in the last 6 years and 9 months, when the last bear bottomed out. It assumes that these investors, who are strictly theoretical because you can't find one, were in cash at the very 2009 stock market bottom and invested it all at exactly the right moment. In fact, those who were invested up to that point in time spent a good chunk of the first few years of the current bull market in catch-up mode. It makes no mention of the investors who, under duress, panicked and sold out during the bear market - no recovery for these folks.
  2. It leaves out goals based investing; i.e. retirement, college, etc. This has nothing to do with your time horizon and risk tolerance, which needs to be a part of any frank discussion with your adviser or yourself.
  3. The Dow Jones Industrial Average peaked at about 14,100 in the last bull market, in October of 2007. Currently, it is at about 17, 200. That comes out to an approximate return or 22% in just over 8 years. The S&P 500 fared a little better with a showing of approximately 30%. For both indices, that is well under the historical returns of over 9% annually.
  4. Measuring stock market cycles from troughs to peaks and peaks to troughs may make the numbers more dramatic, but the thing about these levels is that they lasted for very brief amounts of time, measurable in days during the last bear market. Simply put, this drastically oversimplifies stock market performance to the detriment of unsophisticated investors who may be susceptible to catchy soundbites.
  5. The March 2009 stock market lows were because of fear that the U.S. financial system was about to completely collapse. The October, 2007 stock market peak was because of a housing bubble that couldn't go on. While it is debatable exactly where stocks should have peaked or bottomed back in those days, what is not debatable is that these two data points were extremely short lived and are only indicative of extreme greed and fear.
  6. The above statement discounts the fact that Trillions upon Trillions of Dollars were spent on stock buybacks, shrinking the stock market to adjust to a smaller investor base after the last bear market.
  7. It excludes the Trillions of Dollars of mergers and acquisitions since the bear market bottom, shrinking the number of available publicly traded companies to invest in. 
  8. The Wilshire 5000  index, considered the broadest representation of the U.S. equity market, has less than 4,000 component stocks because there is a dearth of U.S. public traded companies that meet the index inclusion requirements. 
  9. It leaves out that investors, rightly or wrongly, are holding onto stocks as much for dividend income as they are for valuation or potential capital appreciation.
  10. It doesn't include any mention of the explosive growth of the number of investors using options and futures to both hedge against risk and to lever positions without the need to buy or sell short the underlying stocks.
Conclusion: There are many reasons why the stock market can go through a correction or even a bear market. But the fact that someone would take two flickers of data points to come up with a rationale that the stock market MUST go down isn't one of those reasons.

Don't Fear the Reaper...Blue Oyster Cult [Video]...Wow!

Blue Oyster Cult - "(Don't Fear) The Reaper" (Official Live Music Video - HD 1080p)


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