“I don’t know about you, but to me it feels like these past 6-plus years were a particularly challenging (and often tiring) global cycle,” Morgan Stanley’s Neil McLeish said in his Sunday Start note.
Indeed, ever since the economic recovery and equity bull market began in 2009, we’ve heard many argue that this is the “most hated” rally ever.
“Since its start, the premise behind this bull market has been ‘climbing a perpetual wall of worry,'” Wells Capital’s Jim Paulsen wrote recently.
The truth is that investing is always worrisome. If it weren’t, it’d be really stupid because there’d be no risk premium, prices would already be high, and there’d be no opportunity to make money.
This has been going on for a long time.
It seems like uncertainty is always more elevated than usual. Ever since August, we’ve heard market-watchers argue as much. But the past three months of volatility are just part of the last six years of worry.
Step back even further, you could easily just argue that the last six years are just part of century of madness.
Check out the annotations on this chart from JP Morgan Funds. And note the upward trajectory in the market.
There’s always something to worry about, which is what keeps every last person from betting on the market. And yet each of those worries don’t result in permanent doom, and eventually prices go up again.
In October 2008, which was arguably one of the most frightening months of the global financial crisis, Warren Buffett offered some perspective in an op-ed for the New York Times.
… A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 per cent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
“Over the long term, the stock market news will be good,” he said.
How it’s manifesting today.
“The S&P500 is back within a few points of a new cycle high, but it is hard to feel good about the world,” McLeish wrote. “I guess we can blame a rolling series of debt-related problems along the way, morphing from the eurozone crisis almost seamlessly into an EM bear market that gathered ferocity this past six months.”
Add to that China’s unexpected currency devaluation, the Dow crashing 1,000 points in a single trading session, a September US payrolls report flop, and a series of company-specific debacles including the Volkswagen emissions scandal, the crash of Glencore, and accusations of fraud at Valeant,
“[P]erhaps this is what all bull markets are supposed to feel like: a wall of worry,” McLeish said.
Worry keeps the upswing intact.
Like we said: if there weren’t all these worries, then there wouldn’t be a lot of opportunity for investors to invest and generate a decent return.
McLeish goes further to argue that the uncertainties out there prevented investors and traders from going all in, which in turn prevented the market from getting ahead of itself.
“At some level … it is the lack of synchronisation that has kept the global cycle intact,” McLeish articulated. “Our economics team has long argued that an unsynchronized global cycle implies a lack of overheating and an ever-ready supply of central bank ammunition to tackle post-crisis disinflationary pressures. Hence, the wall of worry performs a fundamental as well as its more traditional psychological purpose.”
Obviously, if unsynchronized growth is a good thing for the markets, than the opposite must be true, right?
“To my mind, a China mini-cycle-led reacceleration of global growth combined with somewhat higher DM inflation is a realistic 2016 scenario not fully priced by markets,” McLeish continued. “Given the great global growth scare of 2015, our Chief US Equity Strategist Adam Parker likes to say that ‘good is good’. In the near term, this sentiment makes sense to me. However, I can’t help thinking that a more synchronised upswing for the global economy would ultimately be a less good thing for global markets.”
Indeed, synchronicity in the data may encourage herding in the markets.
“But we’ll worry about this scenario if and when we get there,” McLeish said.
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