My thoughts on the new bull market

A new bull market was born March 23rd.

First, consider, a quick recap of 2020’s wild stock market, which I discussed at length in previous LinkedIn columns. The stock market was at all-time record highs in late February, then suddenly experienced its fastest drop ever into bear market territory (defined as a stock index dropping at least 20% from its peak). That took just 16 trading days. The total S&P 500 bear market was a decline of 34% from February 19 to March 23—fastest ever.

Why so fast? The best forecaster the world has ever known, the stock market, had to pre-price the reality of the grim economic impact of global governmental-imposed lockdowns aimed to slow the spread of coronavirus.

But after that, the S&P 500 recovered over 75% of its losses and isn’t far from new record highs. The Nasdaq reached new record highs in June. History displays lots of bear and bull markets. The longest good, accurate history is from America. Of all bear markets, there has never been a plunge into full scale bear market territory that recovered this much of the drop, 75% or more, that didn’t go on to new all-time highs. People talk about retesting the prior lows but once we’ve recovered this much from bear market territory that has never happened. That it never happened before doesn’t make it impossible. But it does make it very unlikely. Never happened before is a big thing to ask for.

But again, as for 2020’s bear market drop, what happened stock-wise in a month…in normal bear markets takes one or two years, not weeks. The beginning of historical normal bear markets actually roll over gently with the bulk of the declines coming much later. On average about two thirds of all bear markets’ percentage decline has occurred in its last third of duration. Over 55% of the drop has typically happened in its last three months. That’s what happens on average.

It wasn’t that way this time. The normal late stage plunging prices came all at once over a matter of just weeks. 

“The Pessimism of Disbelief”

What happens after a bear market? A bull market! But they come in sneaky ways.

Steep stock declines scare people. They obsess over negative news and spin any and all potential positives back into negatives.

It’s happening now. The Federal Reserve announced trillions of dollars in stimulus measures in recent months in response to COVID-19. While that might be seen as a positive, plenty of investors instead fret this will spark inflation and future problems. Forget your views about it. Doesn’t matter! The sentiment is negative and negative sentiment is what bull markets are built on. Disbelieving positive developments or spinning positives into negatives is called what I’ve long written about as “The Pessimism of Disbelief.” This concept derives from what behavioral psychologists call, “confirmation bias.” It is, basically, the tendency to see what we want to see or think what we think we should see and reconfirm our prior views.

With every tick higher, stocks send a strong message to those who didn’t see the new bull market forming in March: “You’re wrong, you’re wrong, you’re wrong!”

It is human nature to want to avoid signs that show we’re wrong or contradict prior views – confirmation bias also and for the same reasons leads us to see evidence that confirms we were right and to revolt against or be blind to evidence confirming we are wrong. It is technically the tendency to “accumulate pride” and “shun regret” to motivate us to be more confident and keep trying….which worked great for our far distant ancestors hunting gazelle for the high payoff protein justifying many failures. But it hurts us in markets going up against The Great Humiliator, of which I’ve written so often.

Confirmation bias causes you to find reasons why, “I’m not wrong, I’m not wrong, I’m not wrong!” Said otherwise it is things like, “I sold that one; it went down—see how smart I am?” Or, “I sold that one; it went up; I wouldn’t have done it if my spouse hadn’t groused at me all last night and I got such a bad night’s sleep.” Or, “I bought it; it went up; I can do that again!” Or, “I bought it; it went down. The stockbroker misled me when he said blah, blah, blah.” All of this reinforces self confidence in the face of success or failure.

This drives “The Pessimism of Disbelief,” which keeps sentiment low as stocks rise against a myriad of negatives as they always do in every new bull market. It keeps the wall of worry going that every new bull market must climb. It sets low expectations and keeps lowering them. With low expectations, almost any subsequent realities lift stocks—subject, of course, to short-term volatility.

The stock market pre-prices widely known information

One bleak outcome many fret is the possibility of a second coronavirus wave.

Remember, the stock market pre-prices all widely known information between three and 30 months out into the future. I’ve written about this often. That is what the stock market does for a living. The worry about a second wave of coronavirus is priced into the stock market because it’s a very, very widely discussed and known risk. It’s being debated and discussed in the public forum right now. It has been for months. The only ones not fearing it now are in those rare parts of the world feeling their first wave. 

Consider what happened in March. To pre-price a shock (the coronavirus-driven economic lockdowns), the market moved on the shorter end of that three to 30 month time horizon because the lockdowns were sudden and imminent and economic free-fall would be clear soon.

But when it moves to pre-price the very short end of its pre-pricing time horizon it soon moves to pre-price out toward the far end. It does this every bear market as it ends. Always has. It is now pre-pricing for a far better future—maybe in 2021. What happens before then is of less consequence to it. How far is it pre-pricing out in the future toward its 30 month-long range? No one knows or can know. There is no way to know that with any precision. But pretty far—maybe 20 months or 30 months. But it isn’t concerned with what will happen to the economy in August or October.

The new bull market

This new bull market began March 23. When a bull market starts, you tend to get a fairly long run, driven by “The Pessimism of Disbelief,” which is driven by confirmation bias.

I don’t know how long it will last. There could be new big, bad things that come along that none of us anticipate like we didn’t the coronavirus or lockdowns last December--and haven’t been pre-priced at all. Major, unexpected events that aren’t being contemplated or talked about - or euphoria - are the typical factors that can end a bull market. That’s how the stock market works.

Ken Fisher is founder and executive chairman of Fisher Investments. Follow him on Twitter @KennethLFisher.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. The foregoing is for general informational purposes and should not be regarded as personalized investment advice. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.