Yesterday's selloff notwithstanding, global financial markets have had a terrific month. Since bottoming on Oct. 3, the S&P 500 has gained 8.75%, and the MSCI Emerging Markets Index has risen 12.76%. After five months of gut-wrenching declines, I'm actually looking forward to writing my monthly performance report to my clients.
Yet, with headlines still uniformly negative, the market has been clearly climbing a "wall of worry."
At times like this, I am reminded that we live in a world of massive reality distortion. It's textbook journalism that the news media reports 13 times as many negative stories as it does positive ones. Bad news sells. "If it bleeds, it leads." You're more likely to read (and comment on) a story with the headline "The Dissolution of Europe Has Begun" than one that says "Europe's Periphery Rebounds as Ireland Records Second Consecutive Quarter of Economic Growth."
That feeds into what cognitive psychologists call "availability bias." Our perceptions of the world are based the information (and spin) we actually see -- and, boy, the media does a good job of making us feel lousy.
Here's a case in point. Yesterday, I saw a story on the most Web's most trafficked financial website. The headline highlighted that U.S. housing prices had risen in 16 of 20 markets in August. It was actually jarring to see such "good news."
But that proved to be too much of a "half glass full" headline for the editors. When I looked at the story 10 minutes later, it had been swapped out for one that highlighted that housing prices were still lower than last year at this time.
Call me cynical, but my guess is that the click-through rates on the optimistic spin weren't up to snuff.
I was reminded of all this when I saw that the Conference Board's preliminary survey of consumer confidence came out yesterday at 39.8, "one of the worst results in the survey's 40+ year history." U.S. consumers have not felt this lousy since March of 2009 -- precisely at the market bottom.
So let me put a positive spin on this bad new -- one you're unlikely to hear anywhere else.
Sentimentrader.com reports -- one year after a consumer confidence survey reading was reported at or below 50% -- that the return on the S&P 500 was positive 100% of the time. This has happened 18 times -- and what's important is that this includes the market meltdown of 2008. The average return over the next 12 months was 22.9%.
When consumers have gotten this down, it's been good news for stocks. So far, there have been no exceptions to this. If you do the math, based on yesterday's close the S&P 500 should be trading at 1512 on this day as we head into next year's election. If you really want to leverage this idea, you might want to go long the ProShares Ultra S&P500 (SSO). Because this is a leveraged ETF based on daily price movements, you probably won't make twice the returns of SPDR S&P 500 (SPY). But it'll be close enough.
Now, I have plenty of friends much smarter than I who will tell me why "this time it's different" -- and why it's a fallacy to rely on statistics like the ones I cited here. After all, they exclude "Black Swan" events which, in the end, are the only events that matter, and it's precisely this kind of shoddy thinking ("the fallacy of induction") that caused traders like Viktor Neiderhoffer to blow up -- over and over again. So I get that.
But I still thought you should know.