“For 200 years pessimists have had all the headlines, even though optimists have far more often been right.”  - Matt Ridley, The Rational Optimist[1]

Three months ago (after the market fell -6% in two days) I used this blog to write about how market volatility was inevitable.  It included a chart showing 29 market corrections of at least -5% since 2009.  Despite that brief summer downturn, today marks the 771st day of the current “A.I. Bull Market” in U.S. stocks, which started in October of 2022 (remember ChatGPT?).  Since then, the S&P 500 Index is up +72%,while the Mag 7 [2] stocks have performed, well, magnificently, up +194%, as shown below[2]:

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The S&P 500 is up +26% so far this year, hitting record highs 50 times[1].  Now that the market post-Election momentum has cooled a bit, investors and traders are turning their attention to what a Trump2.0 administration is going to look like. Will the new administration succeed in fulfilling the promises made on the campaign trail? Will we see a smaller, more efficient Federal government, less regulations, lower inflation, better immigration policies, more energy independence, tax cuts for workers?

It is often said that investors hate uncertainty, and yet uncertainty is a daily fact of life for us all.  Like it or not, investors must deal with an unknown future.  The optimists among us tend to have a more positive outlook on things, while the pessimists can readily point out many things that can go wrong with just about any rosy outlook an optimist can throw their way.

While an optimist might point to Republican control of both Congress and the White House as something that tilts the odds of success with the domestic Trump Agenda, a pessimist might say that such consolidated control is likely to be problematic.  Furthermore, even if the domestic Trump Agenda gets largely implemented, won’t it exacerbate the budget deficit and continue to add to our accumulating indebtedness?  Also, what are the odds that Mr. Trump can quickly de-escalate the armed conflicts in the Ukraine and the Middle East as he promised he would?  

Pessimists excel at playing “Devil’s Advocate” in pointing out the many things that can go wrong. They also have a wild card they can play whenever they want:  Things can always go wrong that no one saw coming.

Compared to optimists, pessimists tend to be taken more seriously.  Why is that?  Bestselling author and investor Morgan Housel recently recorded a podcast in where he suggests that pessimists get much more airtime on the news because people are more attentive to bad news [5].  Pessimists often sound intelligent as they pontificate with such self-confidence.  Optimists, by contrasts, can seem superficial.  This is why bad news sells more advertising.

One reason for this is that progress happens slowly over longer periods of time, while bad news (9/11 or Pearl Harbor) happens quickly.  For example, Housel mentions the progress made over the past 60 years in the declining rate of mortality from heart disease, which has declined 70%, saving millions of lives.  We are so much better off than our ancestors in terms of life expectancy, health, and average incomes.  These along with many other improvements in human flourishing have occurred over many years and decades.  Such incremental positive news rarely makes headlines [6].

Pessimistic outlooks also strongly appeal to our emotions, compelling action, especially in the investment arena.  If something bad is going to happen that may affect your investment portfolio, it’s better to take some risk off the table, right?  

Not necessarily.  History has shown us that markets tend to reward optimists, those who stay the course over the long haul despite the steady onslaught of negative news we endure daily.  This applies to even bad “Breaking News” events.

Take the case of the COVID-19 pandemic, for example.  Wes Crill from Dimensional Fund Advisors writes:

It’s important for investors to remember that whether you are optimistic or pessimistic about the future state of the world, you should be optimistic about the           market. This is easy to demonstrate using a time when optimism was in short supply. By the end of March 2020, the state of the COVID-19 pandemic painted a scary picture of what the future held for the economy and life in general. And yet, divesting from stocks at that point would have been an expensive mistake. From the market’s bottom on March 23 through the end of the year, the MSCI All Country World IMI Index returned nearly 74%, finishing the year higher in level than before the start of the pandemic [7].

This chart above illustrates how markets continuously readjust to changing perceptions of the future, as millions of global market participants make independent investment decisions over time.  In this case, faced with the uncertainty surrounding the pandemic in 2020, the readjustment of market expectations was dramatic.

I like Morgan Housel’s definition of optimism: “The belief that the odds of a good outcome are in your favor over time, even when you know there will be set-backs, problems and challenges along the way.”  So, when it comes to equity investing, what is it that tilts the odds in your favor?  What justifies this pervasive sense of optimism?

Long-time Morningstar financial columnist John Rekenthaler recently announced his retirement after 37 years (I will miss his sage wisdom).  His last article was sub-titled “A tribute to the miracle of US equities .” [8] In it, he writes “The reason for the stock market’s success is simple:  Companies generate profits, and over time, those earnings increase more often than they fall.”

To sum up, we need a robust marketplace of ideas which includes the opinions of both pessimists and optimists.  We need investors to act on their convictions regarding prospective future earnings of individual companies and to either buy, sell or hold the stocks of those companies accordingly.  This makes for healthy, thriving and competitive financial markets.  Free markets, in turn, are conduits for the proper allocation of capital to its highest and best use.  The subsequent wealth creation it generates, along with the enhancements to our standards of living, are the natural fruit of capitalism.  Financial history in the U.S. is a testament to this.

For whatever reason (or no reason), some of us choose to go through life with a pessimistic outlook.  When it comes to investing in U.S. equities, however, we urge you to choose optimism.

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[1]Matt Ridley, The Rational Optimist, Harper Perennial (2011)

[2]Magnificent 7 stocks: Apple, Alphabet, Amazon, Meta, Microsoft, NVIDIA and Tesla

[3]YCharts

[4] https://www.apolloacademy.com/50-all-time-highs-for-the-sp-500-so-far-this-year/

[5] https://podcasts.apple.com/us/podcast/why-pessimism-sounds-so-smart/id1675310669?i=1000677122750

[6] humanprogress.org

[7] Wes Crill, “Election Results Shouldn’t Dictate Your Investments”, DFA, 11/19/24

[8] https://www.morningstar.com/columns/rekenthaler-report/farewell-now?utm_source=Twitter&utm_medium=social&utm_campaign=Jeff_Ptak