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How Skepticism Can Fuel a Rise

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  • How Skepticism Can Fuel a Rise

    How Skepticism Can Fuel a Rise
    November 27, 2006 (E.S. Browning - Wall Street Journal Online)

    The stock market has been in a surprisingly strong rally since the middle of July -- so strong, that many experienced investors find it too good to be true.

    Ironically, that very skepticism could be one of the reasons the market is doing so well.

    "Some of the best market advances seem to be the ones that are the hardest to believe, and this one is hard to believe," says Paul Desmond, president of research service Lowry's Reports in North Palm Beach, Fla.

    Mr. Desmond was one of many analysts who saw signs during the summer that stocks were running out of steam and heading for more declines. The decline that began in May looked like it could last a while.

    But by mid-July, with broad stock measures down less than 10%, stocks suddenly turned higher. In August, Mr. Desmond says, he decided the rebound was for real and started sending alerts to clients, urging them to buy more stocks. Yet, many experienced investors remained doubters.

    "We keep getting calls, especially from our older clients, saying, 'I am deathly afraid of waking up and getting a 30% decline.' We are telling them that we think there will be plenty of warning signs before something like that happens," Mr. Desmond says.

    AntiSpin: Magical thinking reigns in both the bull and the bear camp. The bears say, "Bull markets end when the last bear is taken out on a stretcher." The bulls say, "Bull markets climb a wall of worry." Nonsense.

    Markets don't care how anyone feels. There are no such rules. "Prices will fluctuate," is as close to a rule as you will find.

    How many stock market participants understand that early stage inflation is driving profits that are driving the stock market today? One percent? Five? Will the realization of this fact and its implications strike suddenly or dawn slowly?
    Last edited by FRED; 11-28-06, 08:45 PM.

  • #2
    Re: How Skepticism Can Fuel a Rise

    Part of the reason to invest in stocks is that it is a hedge against inflation. If inflation occurs, it will show up in earnings, earnings growth, and security price. And, over the long haul, stocks do beat inflation (even if it is miniscule as the chart states). The question if you want the macro and micro to come together is does the earnings growth and dividend growth, by percentage, beat inflation?

    Or a better question would be how much does it beat inflation?

    I would agree that the only new money anyone should put into the market right now would either be a blue chip with good dividend, gold mining stock, or oil company (in terms of broad categories).


    • #3
      Re: How Skepticism Can Fuel a Rise

      Globalization has goosed profits, too, but the benefit of that will all be repaid back some day (soon). Domestically, the cost on labor is beginning to be felt in the consumer economy, which happens to be most of the economy. Oops!