by Gary Alexander
July 18, 2023
The Conference Board – those folks that said a recession was “99% certain” this year – just reported that their June Consumer Confidence survey turned positive for the first time since January of 2022.
That 17-month run of negative sentiment was the second longest streak since 1987, trailing only the 18-month run from November 2007 to April 2009. That’s a sad statistic, since that means investors were downbeat during the first nine months of 2022 (understandable), but also during the huge run of profits since the market bottomed out on October 12-14, 2022. Optimism is risky, but pessimism seems riskier!
||Oct. 13, 2022
||July 14, 2023
|Dow Jones Industrials
|Data Source: Yahoo! Finance
This post-mortem is not limited to the rear-view mirror. Starting in May and June of 2022, I indicated a market bottom was likely in October 2022, based on history and fundamentals. In August and September, my compatriot here, Jason Bodner, said the same thing. We anticipated this sharp rally well in advance.
What’s next? Bespoke Investment Group reported that 2023 is the 23rd year since 1945 in which the S&P 500 rallied over 10% in the first half of the year. In all 22 prior years with double-digit percentage gains in the first half, the median second-half performance was a gain of 10%, rising in 18 of 22 years (82%).
In the 55 years when the S&P 500 was either down, or up less than 10% in the first half, the median second half performance was a gain of just 3.5%, or about one-third as much. We’re off to a promising start to the second half, but two weeks don’t matter much in the long run. We can always see corrections:
- On July 16-17, 1990, the Dow showed no change, closing a whisker shy of 3,000 at 2999.75 two days in a row. That was the start of a 21% 12-week bear market, but it was also the start of the best decade of the 20th
- On July 17, 1998, the Dow closed at a then all-time high of 9,338. Then came the Russian Ruble crisis and a big hedge fund collapse. The Dow fell 19% by the end of August, but it soon rebounded to 9,330 by Thanksgiving.
These examples underline the virtue of long-term investing. Dr. Jeremy Siegel first published his book “Stocks for the Long Run” in 1994, before the tech-stock boom began in 1995. Born in 1945, like me, Siegel has seen a lot of ups and downs, so he knows the ups far outweigh the downs in time and power.
Just after the turn of the century, three scholars examined 16 global markets and found that the same was true in the 101 stormy years from 1900 to 2000 in 11 European nations, plus the U.S., Australia, South Africa, Canada, and war-torn Japan. It didn’t matter that some of these economies were destroyed and had to rebuild from scratch. Their detailed findings were published in 2002 as “Triumph of the Optimists.”
In the 21st Century, Louis Navellier and I have also followed the daily economic encouragements of our favorite economist, Dr. Ed Yardeni. His many statistical and market insights are captured in several books, most notably in “Predicting the Markets.” I recommend reviewing all three of these books:
In addition, my friend and Salish Sea neighbor Keith Fitz-Gerald offers a morning update that is often brisker than a cup of coffee. He calls it “The Morning 5 with Fitz: 5 Ideas in 5 Minutes.” He began last Friday’s offering by saying “Optimism is the only true path to profits. Why? Simple.” Two main points:
- A positive mindset drives proactive action: Optimism requires proactive decision-making and a willingness to take calculated risks. That’s why optimistic investors are more likely to identify opportunities, make strategic investments, and capitalize on market trends. This proactive approach, in turn, leads to higher returns and greater success over time.
- Confidence attracts investment and fuels market growth: Optimism breeds confidence, which is a powerful catalyst for attracting investment and stimulating market growth. At the same time, positive sentiment creates a positive feedback loop where increased investment leads to improved market performance, which, in turn, reinforces optimism. Both drive sustained upward momentum and favorable outcomes in the financial markets over time.
“Ergo… BE POSITIVE! And INVEST IN OPTIMISM!” — Keith Fitz-Gerald (emphasis his)
Are Optimists Blind…Naïve…or even “Cockeyed”?
Here’s another angle. As a music historian, I note birthdays of the composers of the Great American Songbook in my weekly radio programs. Last weekend, I featured no fewer than seven who were born last week (July 10-15), of which five are lyric writers, and all are optimists. Here’s a brief sampling:
Oscar Hammerstein (born July 12, 1895) wrote “I Whistle a Happy Tune,” “My Favorite Things,” and “A Cockeyed Optimist.” Ted Koehler (born July 14, 1894) wrote “Get Happy” and “I’ve Got the World on a String.” Dorothy Fields (born July 15, 1945) wrote “The Sunny Side of the Street” and “Pick Yourself Up (Dust Yourself Off and Start All Over Again)” in the depths of the Depression, and Jerry Herman (born July 10, 1931) wrote a classic capitalist song for Wall Street: “A Penny in My Pocket,” from Hello Dolly.
Two birthday writers were immigrants to America, who wrote of the dreams of freedom in this new land. Ernest Gold (born July 13, 1921 in Vienna, Austria) wrote the stirring theme to the movie, “Exodus,” and Michael Pashelinsky (born July 10, 1900 in Lithuania) became Mitchell Parish in America and was inspired by the stars above while writing about them in his third language (English) in songs like: “Stars Fell on Alabama,” “A Stairway to the Stars,” “Moonlight Serenade,” and the all-time classic, “Stardust.”
In my investing lifetimes, I spent the first 25 years (1965 to 1990) in the Doomsday camp as a perma-bear, always expecting the next crash. For the first two-thirds of that time, say through 1982, that worked out fine, as we were in a stagflationary malaise, when none of the mainstream investments – stocks, bonds, or cash – paid any real returns, while the Swiss franc, gold, and other commodities were paying off well.
But then the Reagan boom left me behind. The 1987 crash seemed like a “payday” for the bears, but no recession followed, and we reached new highs within two years. I finally saw the light and converted to an “opportunity” investor, a growth guy, a perma-bull, if you wish, in 1990, just in time for the big boom. Bottom line, my net worth was mired below zero as a perma-bear, but turning bullish made me well off.
In October 1990, I moderated a bull/bear panel of 500 at the New Orleans Investment Conference. The Dow had collapsed, as I wrote above, by 19% in three months, and the audience was over 99% bearish (our poll showed only two bulls in an audience of 500), yet that was the perfect time to buy, to go long, with the Dow multiplying 5-fold in the next 9+ years, and NASDAQ running circles around the Dow.
But it wasn’t “cool” to be bullish then. It was naïve, blind, and even “cockeyed,” as the song says:
“A Cockeyed Optimist” (song excerpts)
… they call me a Cockeyed Optimist, Immature and incurably green.
I have heard people rant and rave and bellow
That we’re done, and we might as well be dead,
But I’m only a cockeyed optimist
And I can’t get it into my head.
I hear the human race Is falling on its face
And hasn’t very far to go,
But ev’ry whippoorwill Is sellin’ me a bill,
And tellin’ me it just ain’t so.
I could say life is just a bowl of Jello
And appear more intelligent and smart,
But I’m stuck like a dope
With a thing called hope,
And I can’t get it out of my heart!
Not this heart.
(By Oscar Hammerstein II and Richard Rodgers in “South Pacific,” 1949)
In my experience, pessimism sells better, just like it did in 1990, but optimism paid better rewards.