Pessimism of disbelief - best foundation for stock market recovery
HOW far will stocks fall? That question is foremost on investors’ minds following the Straits Times Index’s decline in the past week as global stocks hit new lows.
The bad news? No one can pinpoint when stocks will turn up, especially since this bear market is so heavily sentiment-swayed. Its agonising length stems from the fact that myriad fears fuel it.
The good news? It resembles most latter-stage bear markets in one key way: It has spawned what I call the pessimism of disbelief, which is the foundation for a recovery.
I have written about the pessimism of disbelief for decades. It surfaces after major downturns whack sentiment – leading investors to focus solely on negatives whilst ignoring good news, or arguing that positives will soon morph into even worse negatives.
The pessimism of disbelief renders any reality short of disaster a positive surprise, which is the fuel necessary for a recovery.
Pessimism is everywhere now.
Bank of America’s September fund manager survey found global growth optimism at record lows, with the number of respondents underweight equities and overweight cash at historic highs. State Street’s gauge of Asian institutional investor confidence has plunged from last year’s relative peak.
Despite a tiny August uptick, US consumer sentiment sits near record lows in one survey dating to 1952. European polls are similarly glum.
Bleak headlines warn of an energy-driven global recession, spurred by Russia throttling gas supplies to Europe. Mysterious Baltic Sea gas leaks, which have elicited sabotage accusations, and Putin’s nuclear talk are roiling sentiment further. Geopolitical tensions in Europe and Asia alike create widespread fears of globalisation’s demise – as shown in the recent comments by Deputy Prime Minister Lawrence Wong.
Importantly, any positives encounter “Yes, buts”: Yes, the Ministry of Manpower reported Singaporean employment recovering to near pre-pandemic levels; but economic uncertainty means the labour market’s outlook is shaky. Yes, global supply chain snarls are easing; but that surely stems from waning global demand. Yes, 2021’s weak US dollar fears evaporated; but the strong dollar now dooms emerging markets. Yes, global recession fears are widespread; but markets somehow haven’t pre-priced them.
This isn’t new. In the spring of 2020, the pessimism of disbelief ran rampant. Ugly, backward-looking data stole headlines – such as Singapore’s retail sales falling 31.1 per cent month on month in April and a further 20.3 per cent in May. Yet, Singapore stocks rose 32 per cent from March 2020’s low to the year’s end.
During late-2018’s global downturn, Brexit and trade war fears reigned. In 2015 and 2016, worries included China’s devaluation rippling across Asia and a commodities rout.
Downturn jitters were broader 2011: Europe’s debt crisis threatening the euro, America’s debt ceiling fight, a potential Chinese hard landing.
Today’s cocktail of worries has more elements: inflation, war, energy shortages, high oil prices, rising interest rates, supply chain logjams, a potential global recession, and political polarisation among them. The swarming fears take turns harassing investors, depressing sentiment.
But ubiquitous gloom always underpinned a future rebound. Lower expectations end up priming new bull markets, and dourness can pervade long after stocks start to soar.
Again, recall 2020: Many claimed markets ignored negatives as stocks ignited. That year, Singapore’s Q1 GDP fell 0.1 per cent quarter on quarter just before the rally began. It plunged another 12.6 per cent in Q2, even as stocks climbed.
Consumer spending sank amid renewed restrictions. Retail sales frequently dipped throughout 2020 and 2021. Entire industries – travel and airlines – floundered.
Once clarity emerged, however, stocks had already surged. This observation doesn’t mean to dismiss 2020’s painful realities. But perfection wasn’t needed for a rally then. It won’t be needed now.
I often call the stock market “the great humiliator” because it tries to fool as many investors for as long and as much money as possible. It has certainly hit me this year. But never forget that the pessimism of disbelief is one of the great humiliator’s most effective tools. It pushes too many to the sidelines, waiting for clarity as markets climb higher.
Don’t let it fool you this time. Embrace the uncertainty and own stocks now.
The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally.
