Oh, the Fear of It All!
"Is the stock market headed for a catastrophic crash? Will ‘Black Monday' be re-lived in painful detail for millions of investors just like you?"
To discover the answer to these questions the reader is asked to send $149 for a year's subscription and a handful of "free reports" on how he can avoid being trapped by the granddaddy of all stock market crashes -- coming soon to a stock exchange near you!
Unfortunately, the above copy material for a financial newsletter promotional that I received (as quoted above) was the same exact promo that I'd received in the mail every year since the last bear market bottomed in late 2002. More than four years and many mass mailings later, this particular publisher is still waiting for his Mother-of-All-Depression scenario to materialize. Meanwhile, the benchmark S&P 500 index has risen from a bear market low of about 800 to its most recent high of 1510 in the last four years.
So here we are four years into the bull market and hardly a soul on Main Street has bought into it. Everywhere we see fear, worry, pessimism and a latent feeling that everything is going to unwind at any minute. How did we go from a nation of super-optimists 10 years ago to a nation of fear-laden bears today?
Back in the heady days of the "tech bubble" of the late 1990s, newspaper headlines were the polar opposite of what we see today. There was a complete absence of anything resembling the fear and dread that daily greet us when we scan the headlines of our favorite newspapers and magazines. Instead we were told that everything is rosy, the future would be bright and bold and the Internet stocks would continue making millionaires of one and all.
I used to walk past a Washington Post newspaper rack every day on my way to work back in 1998. I would scan the front page headline as it appeared in the rack as I held 50 cents in my hand, looking for an enticing reason to buy the day's news. Invariably, I would walk away disappointed: the front headlines were just too boring! The gist of those headlines were that the so-called "New Economy" would continue to prosper as the NASDAQ continued ever upward and anon. Also, that the U.S. unemployment rate would soon hit zero. It was classic headline material for an aging bull market that was nearing its zenith.
Cue the bear. In 2000 the unbridled optimism those glowing headlines helped create was quickly replaced by shock, then nervousness, then outright panic as the NASDAQ imploded and brought down with it all the ill-founded hopes and dreams that its upside run had spawned. The vicious bear market of 2000-2002 wiped out billions in the pensions and portfolios of American investors who were unfortunate enough to have held stocks through those rough years.
Nowadays the news headlines are much more exciting than they were in those carefree days of 1998-99. Each day brings a new set of bromides about how things will go from bad to worse in the economy and how a recession is imminent. We're told constantly that the housing price deflation will never end and that it will soon bring the stock market down with it. And of course there are the ceaseless warnings of a looming dollar collapse. It's enough to make converted super bears out of even the most die-hard optimists!
The main emphasis in the headlines since 2004 especially has been fear. You've seen the collection of fear-laced headlined we've clipped and made into a "fear collage" over the years. It isn't very hard to do with all the negative news stories out there, especially during those times when the stock market has declined and is basing. But the point here is that fear has been a near constant for at least the past four years. Through the repetition of words that connote fear the media have been able to create a collective mindset that caters perfectly to keeping the recovery bull market in stocks on a solid footing. This of course is done through the principle of contrarianism, which says that when the majority of investors are bearish or afraid the market must go higher.
One way to affect hypnosis is through constant repetition. This is a well known fact of the science of behaviorism. Since 2001, and especially since 2004, the "F" word has been used with stunning regularity in the headlines of all news agencies. Words like "fear," "worry," "concern" and "gloom" show up with such predictability each day in the financial news that many unthinking investors have simply taken it for granted that the markets are walking on proverbial eggshells and that things can only get worse from here. The mass hypnosis of the mainstream press in emphasizing fear since 2001 has succeeded in creating a permanent climate of fear for the retail investor. The market's "Wall of Worry" is firmly in place.
Through the clever use of mass hypnosis, the media have created a bear market mentality among multitudes of investors who might, under normal circumstances, have participated in this bull market recovery since 2003. Instead we see a huge number of investors still standing on the sidelines, or worse, entrenched in the camp of the super bears waiting for that next "Big One" to come along.
While some have argued that the press is nothing more than the mirror of society, reflecting the psychological undercurrents of the people, just the opposite is true. The mainstream press actually creates attitudes and convictions. The bearish investor psychology we see everywhere today in the sentiment polls is a product of the media's relentless barrage of fear. Investors have been trained like Popper's Penguins to react to bearish news stories, such as the recent sub-prime lending fiasco, with fear and trepidation. The news headlines impress upon the minds of investors to sell and stay away from stocks since the worst is always feared.
Last week was a perfect example of this phenomenon. Even though the major indices were making new highs for the year, and some made all-time highs, the percentage of investors describing themselves as bearish in the latest AAII sentiment poll actually *increased* rather substantially to its highest reading in months (54%). Meanwhile the percentage of bullish investors declined substantially to its lowest reading in months (29%). In former days a move to new highs in the market would create just the opposite effect with investor sentiment. But since investors have been trained for so long to become more nervous with rising prices this is what happens, and again, it keeps the market's Wall of Worry in place.
MZM growth this year has been explosive, right up until last week's release of this important monetary statistic. The massive increase in money supply can only be interpreted as bullish for the future outlook of the stock market. It will also ensure the economy's resuscitation from its present somnambulant state. The MZM chart shown below (yearly percentage change) is screaming "bull market in stocks!" and "economic strength ahead!"
This is huge and it cannot be emphasized enough! The Fed is gift-wrapping a package to investors well in advance. The trend in MZM growth should be on the front page headlines of every newspaper in the country. But instead investors are served up with yet another heaping helping of fear, fear and more fear.
On this subject, most financial reporters focus on the lagging economic numbers released by the government instead of the leading indicator of money supply rate of change. It ensures that the analyst and the mainstream news reader will both end up in a ditch. Financial forecasting is about looking forward, not backward. And some of the best leading indicators are provided by the Federal Reserve itself.
The questions that should be asked are, "Where is all of this leading us to?" and "When will it end?" The answer to the first question is that the trend toward increasing fear in the face of rising stock prices is leading to a climax of fear. After this occurs the public will finally shed their bear suits and jump headlong into the stock market in capitulation to the uptrend. When it happens it will mark the "beginning of the end." There has never been an instance when a major bull market didn't end with broad and eager public participation, which is something we don't see today. When greed supplants fear as the dominant emotion among the investing public then you will know this bull market is nearing its apogee.
The public will someday come back again to the stock market in droves, much as they were late arrivals to the party in the 1990s bull market. Once the news headlines turn rosy again it will be the signal for the final stampede to begin. Until then, the bull market will remain firmly intact.