1. One of the main goals of brokerage research analysts is to get noticed by institutional investors. While trying to get attention, there’s almost no penalty for coming to a conclusion that’s wrong–because everyone understands what is going on. And even if you become famous, clients usually forgive and forget. So a reasonable strategy for the sell side is to make a strongly out-of-consensus prediction. If it comes true, you’ve struck gold. If not, it’s a case of “no harm, no foul.”
A typical portfolio manager gets enough market research, market commentary, etc. each day to make a stack at least two feet high if it were all on paper. I’d imagine reporters have a similar experience. This means that in normal times, the startling but unlikely prediction gets a quick glance at the summary paragraphs and then the “delete” key–or maybe just “delete.” At times of great stress, when investors have seriously lost their bearings (usually right at turning points in the stock market), however, these attention-getters are printed out and read on the train ride home.
When these things get taken seriously, particularly if they make it into the press, they can be wonderful contrary indicators. Perhaps the most famous of these was the “Death of Equities” cover story in Business Week in 1979. Bears and bulls have also adorned magazine covers at just the wrong time.
Today an article appeared in the Wall Street Journal outlining a Goldman report that argues the Dow could fall to 5,000 before the current bear market is over. My point isn’t whether there’s any intellectual merit to the Goldman case for a 25% drop in the market from here. It’s that it’s headline news in the Wall Street Journal. This may be as close as we get to a bear’s head on the front page. I figure it may be good enough.
2. Bear markets typically go through three stages: hope (also called denial), boredom, and despair. Some people think that stage three requires a cathartic, high-volume selling panic, where stocks plunge as investors give in to the fear they’ve been battling throughout the down market and offload every stock they own.
This doesn’t need to happen. It certainly didn’t in 1982, when the bear market ended in a whimper, instead. Despair can also be an attitide–the loss of hope of near-term good news, a resignation to the market running whatever course it decides to take. I mention this because I realized last Thursday that that’s the way I’ve been feeling lately. Given that I’ve been through very ugly bear markets both here and abroad, it takes a lot for me to lose my enthusiasm for the market. So maybe stage three is well underway.