It’s an adage that’s at least a half century old: The stock market always climbs a wall of worry. I remember hearing it many times when I first came to the “Street” in the early 1960s. Throughout that decade, the bull market had many setbacks, from the Cuban missile crisis to the tragic Kennedy assassination to Vietnam and emerging inflation pressures. But stocks recovered time and again to reach record highs by 1968.
The current cycle also fits the worry wall characterization very well. Since March 2009, when the S&P 500 hit the mark of the beast’s level of 666, common stock prices have soared over 130%. Just recently, the Dow and the S&P have hit all-time new highs.
The amazing market recovery occurred even though there has been no shortage of worries. Around the time markets were bottoming in early 2009, predictions of gloom and doom were everywhere. Famous money managers predicted the Dow would fall another 25% to 5000. That spring, the IMF declared that “The current outlook is exceptionally uncertain, with risks still weighing on the downside.” Other experts were forecasting a full-blown depression. Over the next four years, there have been even more walls of worry for the market to climb: the eurozone saga, the US debt downgrade, the fiscal cliff, sequestration, Cyprus. It never ends.
To be sure, these worries have had an impact. There have been about a dozen corrections greater than 5%, two of those were greater than 10%, and the most recent one bordered on 20%. Astute short-term traders could have sold at the top and bought back at the bottom. But for most investors, panicking out would have been a big mistake.
The cyclical market advance has continued, and it is now attracting more investors to the party. Recent money flow data shows equity mutual funds finally having significant inflows. No wonder: it looks to me like more and more people are recognizing that this stock market rally is no dead-cat bounce or some unsustainable bubble inflated by the Fed’s quantitative easing.
The driver behind the market’s strength has been simple old-fashioned fundamentals. Unemployment is slowly falling, housing is snapping back, and home prices are recovering â€“ up 8% from last year, according to the latest Case-Shiller data. Earnings and dividends, meanwhile, have surged. The way I see it, popular valuation metrics show a market that is no longer undervalued after its four-year climb of the wall of worry, but is also still a long stretch away from being overvalued.
Published by McAlinden Research Partners, a division of Catalpa Capital Advisors, LLC.
Joe McAlinden, CFA
Chairman and CEO
Catalpa Capital Advisors, LLC