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  • Writer's pictureRobert Baharian

Climbing The Wall of Worry

And that's a wrap for the first half of the year, and the results are in. Stocks are (much) higher than they were at the beginning of the year. How did you do? I have no idea how you did, here's what the market delivered investors:

The US stock market (S&P 500) up 16.38%, Nasdaq up 32.74%, the Australian stock market (ASX 300) up (a measly) 3.54% and global stocks up 17%. These numbers would make any annual return number look good, yet they are half year results.

Cast your mind back to the beginning of the year. What were you hearing? What were the fund managers yelling? What were the economists and pundits telling us? What gave them such confidence in their opinions? What information did they have that the rest of us did not?

  • 2022 saw the stock market's worst annual fall since the GFC.

  • Inflation was still over 6%.

  • More rake hikes were expected.

  • As a result, almost everybody was predicting a recession — and atrocious corporate profits.

  • Oh, and there was the not-insignificant risk that the U.S. would default on its debts, setting off a financial crisis.

Things worked out ok. Inflation is now 4%, and the Fed took a breather on rate hikes. A debt ceiling deal got done, and the US economy is a lot stronger than many expected. Corporate profits were fine. In fact, so too were margins. Even the worst banking panic since the financial crisis, which broke out in March with the failure of Silicon Valley Bank, didn't weigh on the market for long.

Why were the experts so wrong? A more important question to ask is whether you were relying on this information from these people to guide your investment decision making? How many more times do investors need to go through this? When will investors learn?

Having missed the rally, these folk are now running around with their hair on fire yelling about the lack of breath in the market, the imminent recession, and how unsustainable this rally is. I do wonder whether their narrative would be any different had they participated in the rally.

I find it's always helpful to put things into perspective. Here's the "unsustainable" rally put into perspective over the last two years.

The Nasdaq is still down about -5%, the S&P 500 is up +3.6%, and the ASX 300 is still down -2%.

There's an old aphorism on Wall Street that stocks like to climb a "wall of worry." It basically means stocks tend to rise when investors start out as pessimists but grow gradually more confident when ugly scenarios they worried about don't come to pass. This is basically what's been happening in 2023.

You don't have to go back to far for such examples, think 2020 (COVID-19), 2019 (US trade war with China), 2016 (Brexit vote and Trump elected President) and 2013 (Eurozone debt crisis).

Observing and commenting on market performance from the bottom always looks unsustainable. When put into perspective however, the picture becomes a lot clearer. The future is bright.


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