5 reasons everyone hates this bull market

Commentary: Faced with evidence, buyers still don’t believe

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By Jeff Reeves

Reuters

Investors have been making a ton of money lately, with the broader Standard & Poor’s 500-stock index up almost 20% this year through July and gaining about 35% since January 2012.

Longer term, the S&P 500 /quotes/zigman/3870025 SPX +1.18% is up 70% in the past decade — and that’s not even counting dividends!

So why is everyone so quick to doubt the rally? Let me count the ways:

1. Failure to separate stocks from the economy

Consider China, which will see GDP growth above 7% this year but has seen its stock market drop about 12% as measured by the SSE index. Or take Germany, which will be lucky to finish 2013 with any GDP growth at all, but has seen a rally of about 9% in the DAX /quotes/zigman/2380246 DX:DAX +1.63% this year. Many well-meaning pundits talk about U.S. economic headwinds as they relate to U.S. stocks — but in truth, stocks and economies can and do move separately.

2. Moralizing over corporate profits

This year, corporate profits as a share of GDP hit their highest level since 1950. Meanwhile, jobs are hard to come by and wages are stagnant with median household income 8% lower in 2011 than it was in 2007 before the financial crisis hit. Furthermore, median household income is down almost 9% from its 1999 peak.

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Federal Reserve officials pointed to modest growth, higher mortgage rates and low inflation as factors it is watching closely in its newest statement WSJ chief economics reporter Jon Hilsenrath discusses on The News Hub. Photo: AP.

Many think it is unfair for corporations thrive as the American people struggle, and I happen to agree. But moralizing over whether U.S. stocks should make more money as their workers is a philosophical and political issue… not a portfolio issue.

3. Stubbornly sticking to a bad call

Hubris and delusion are occupational hazards on Wall Street, and it’s often more common to see investors double-down on a bad call rather than admit a mistake. Take Peter Schiff of Euro Pacific Capital, who continues to beat the hyperinflation drum despite his dire warnings in 2008 coming to nothing and nearly every data point proving the opposite.

Look, we all make stupid calls as investors and it actually shows maturity and perspective to admit a mistake and move on. (For the record that’s why I attempt to personally disclose my stupid mistakes regularly). There’s no shame in a bad decision made during the unprecedented state of global markets over the last five years — but making the same mistakes in the face of new data just to avoid saying you were wrong is no way to run a portfolio.

4. Reluctance to buy a top

I personally believe the market is ready for a pull-back after front-loaded returns, lackluster earnings and continued downward revisions to GDP forecasts at home and abroad.

But admittedly, that perspective may be colored by the fact that I have some ready cash to invest and I’m leery of buying a top midyear; a correction would be just what I need to invest with confidence.

My sense is that many rally doubters are those with similar motivations, trying to turn back time to a missed buying opportunity — and as soon as they get their 5% to 10% dip, they can eagerly become bulls. Of course, keep in mind that those who bought back in May right before the Dow /quotes/zigman/627449 DJIA +0.89% broke 15,000 can hardly be accused of buying a top.

5. Information overload

Feeding all these ideas is the financial media smorgasbord of 2013, piled with a wealth of data and analysis as well as clever soundbites masquerading as insight. Even in a less-complicated macro environment it would be difficult to separate quality news from noise, actionable events from headline-grabbing hype, long-term investing strategies from get-rich-quick marketing tactics.

There’s always the old platitude about Wall Street climbing a “wall of worry” during rallies, and that a healthy dose of skepticism is a good way to keep investors honest and maintain perspective.

But just be sure that your perspective on this rally is rooted in some kind of factual argument. There’s no guarantee you will make the right call in this crazy market, of course, but you will have a much better chance of investing wisely if you can be self-aware and avoid these pitfalls.

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