When will the wild ride stop? Since late October, Chinese stocks have gone from a sharp sell-off to a dramatic rise … based on little more than speculation over Party Congress implications and rumors of lifting Covid restrictions. The swift turnaround has many wondering: Is the brutal 21-month bear market finally over? I can’t tell you that. No one can with any certainty. Anyone claiming to pinpoint market bottoms is a charlatan or fool. But a white-hot turnabout on little more than thin rumors illuminates a key reality: Sentiment is at a wretched rock-bottom — the type of climate that fosters new bull markets. That means today’s biggest risk isn’t more downside ahead. If you need equity-like long-term growth, the biggest risk now is letting volatility scare you from stocks. Let me explain.
As investing legend Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Today, pessimism clearly reigns, and almost everywhere — stealthily fueling the next bull market. Yes, some many economic data remain weak. Chinese exports and imports’ sliding in October sparked fretting. So did producer prices’ slipping 1.3% year-on-year, which many took as a sign of global economic trouble. Western headlines trumpet record-low optimism among U.S. businesses in China and paint political tensions with the U.S. as insurmountable economic headwinds. Some even deem China “uninvestable.”
But neither a slowing world economy nor patches of Chinese weakness are new— or unexpected, as I detailed in my last column. And rampant pessimism over well-known worries that have been long debated must be already reflected in stock prices. That is beautifully bullish. Stocks move most on surprises. Pervasive negativity means reality doesn’t have to be great for the kind of positive surprises causing stocks to rise — it merely has to be “not as bad” as putrid forecasts. Hence Templeton’s maxim. He knew bear market gloom pummels expectations, fueling positive surprises — and new bull markets.
Look no further than recent weeks to see how little can spark a rally amid today’s doom and gloom. Chinese stocks surged 13.7% in November’s first five trading days as rumors of lessening Covid curbs circulated. That was little more than pure speculation! Every day, Western commentators chitter-chatter about easing restrictions. Maybe it will happen. Maybe not! But even if curbs lessen, will they return if an outbreak occurs? No one knows. Who can forecast how the virus may develop or what measures officials may deem necessary to confront its spread? Hence the rumors are less important than the reaction to them — the bullish surge showed spirits have sunk so low almost any positive, real or imagined, triggers big gains.
For long-term investors who require equity-like growth, that means the greatest risk today isn’t Covid restrictions, real estate weakness, tech regulation or global inflation — it is being out of stocks when a new bull market takes hold. Yes, fears abound. But after months upon months of chatter, stocks have surely weighed them. So ask yourself: What is more likely — that economic reality proves even worse than the dour future most see looming? Or that it is better, even by just a bit?
If the latter proves true, you will want to own stocks now. History shows bull markets’ most powerful gains usually come early. Since 1993, the median MSCI China return just three months after bear market lows is 27.4%. Six months after the bottom? A median gain of 43.9%! Recall early 2020’s lightning-fast rebound. Chinese stocks soared 36.6% in the three months after their March 19 low. Six months after the bottom, they were up 44%.
This isn’t merely a Chinese phenomenon. Since good U.S. data start in 1925, American stocks have posted median returns of 22.8% in U.S. dollars in bull markets’ first six months. Why does this trend hold globally? Psychology. Long, painful bear markets sap spirits, causing investors to overreact to the downside. Eventually, expectations fall so far almost any reality surpasses them. That triggers a turbocharged relief rally. The specifics of each bear and bull market may change, but the psychology underpinning this market driver doesn’t.
Crucially, big early gains compound throughout bull markets. Hence, they are very hard to recoup if you miss them! That is why staying invested through a bear market isn’t the worst thing an investor can do. Staying in during most of a bear market’s decline — only to sell before the rebound — is.
When the exact bottom arrives — if it hasn’t already — is anyone’s guess. After 50 years of managing money, I have yet to find someone who can pinpoint bottoms in real time with any consistency. I have seen endless investors fail trying, though, selling after sharp drops while fearing more ahead. Fearful investors lock in the drop — and miss the recovery. Worse: They must decide when to buy stocks again. That means admitting the exit was wrong, psychologically tough to do.
Always remember: Volatility and stocks go hand-in-hand — big swings are the price investors routinely pay for stocks’ long-term reward. While you can’t control the market, you can control how you react to it. To keep cool, follow my four-step volatility plan.
1. When volatility strikes and you feel like reacting, don’t check your portfolio. Do something unrelated to investing. Hike. Play tennis. Cool your nerves with some “bao bing.” Anything — just get away from markets.
2. Put market movement in context. If you are in good health with a reasonably long life expectancy, you should be planning for decades ahead— not days, weeks or months.
3. If your goals require stocks’ high returns, they are your baseline investment. Deviate only if you see a huge, probable negative others don’t—exceedingly rare. Don’t mistake today’s regulatory and geopolitical worries for that. They are far too widely watched to surprise markets.
4. Remember: Volatility cuts both ways — down and up. Stocks generally feature more of the latter, something long downturns make investors forget.
This bear market has been brutal, and I don’t dismiss the frustration it has caused. It may not yet be over. But missing the inevitable bounce only adds to the angst. Stay ready for the rebound.
Ken Fisher is the founder and executive chairman of Fisher Investments.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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