Why Stocks Have Rallied

Investing is part art and part science. Psychology also plays a role and that’s where investors get in trouble. People generally love the stock market when it is high and hate it when it is low. It’s backwards.

Most people remain bearish on stocks. That’s why money market assets are at an unheard-of 43 percent of market cap. Instead of seeing opportunity, they focus on the bad economic news and rationalize that stocks can’t (or shouldn’t) go higher. After all, we are in recession. Unfortunately, it doesn’t work that way.

Going back to 1926 there have been fourteen recessions. Looking at duration, stocks typically hit their low point about mid-way through the recession (after 17 months in our current recession, surely we have hit the mid-point!). That means that most of the time new bull markets start during, not after, a recession.

What about the dismal unemployment figures? Unemployment is bad and unfortunately it will get worse, but that headline-grabbing figure doesn’t mean stocks will fall. On average the market has bottomed and begun to rally seven months before the peak in unemployment.

We’ve seen a lot of bad stories that say “this hasn’t happened since xxxx,” usually pointing to the 1930s, 1974, or 1982. While the stories are negative, one should note that the year they point to was typically a great time to buy stocks.

When the market factors in the worst case scenario (it did), the news doesn’t need to be good for stocks to rally. It just needs to be less bad. That’s what is happening now, especially in emerging market securities, where they are hitting new seven month highs. Opportunistic investors are looking past the current headlines and are anticipating better days ahead.