With the money-losing memories of the financial crisis still fresh in their minds, investors are having a tough time embracing the new bull born in early March.
Despite the best back-to-back quarters of gains since 1975 for the U.S. stock market and a 56.2% rise in a 6 1/2-month span, many investors are questioning whether the good times can last.
Who can blame them, given all the dire warnings about another Great Depression earlier this year? Many investors are behaving as if they're suffering from a Wall Street form of post-traumatic stress disorder. Unlike normal bull markets, when the most common question investors ask tends to be, "How high can stocks go?" This time around, jittery stockholders can't stop asking: "Is the rally almost over?"
"This is one of the most unloved and disbelieved bull markets that I can remember," says James Stack, a money manager, market historian and editor of InvesTech Research newsletter
The disbelief comes despite mostly encouraging data that point to an economic recovery and rebound in corporate earnings. Skepticism abounds even though the Federal Reserve says the recession is likely over, and growing signs point to a housing market on the mend. Not even upbeat comments from bulls who say the direction of the market remains up have been able to alleviate fears.
Signs of investor distrust of stocks and the current rally are plentiful.
The latest poll measuring the sentiment of members of the American Association of Individual Investors shows that bears (45%, vs. a long-term average of 30%) outnumber bulls (39%). That lack of faith in stocks is reflected in AAII members' current allocation of stocks, which made up just 54% of their portfolios at the end of August, below the long-term average of 60%.
Angst on Main Street is evident in the wariness of Arlene, 58, and Mike Armstrong, 59, a working couple from Columbus, Ohio. They stayed the course during the brutal bear market, but are now considering selling. Arlene quotes husband Mike as saying: "The stock market has left me feeling as if I've been betrayed by a mistress. Now, I feel as if I can never trust her and have to keep a watchful eye on her all the time."
Similar thinking can be found on some Wall Street trading desks. For example, Mohamed El-Erian, the CEO and co-chief investment officer at giant money management firm Pimco, is advising investors to lower their allocation of stocks. The reason: to reduce risk in what the firm refers to as a "New Normal" world, characterized by slower economic growth and lower asset price appreciation going forward. But despite all the skepticism, the fact remains that the stock market has been performing well. After Wednesday's 0.3% drop to 1057.08, the Standard & Poor's 500 index posted a 15% gain in the just-completed third quarter — its best third-quarter gain since 1970.
There is a healthy contingent of bulls who say the ingredients are in place for a continuation of the stock rally. The key ingredient, of course, is that the economy is in recovery mode, which historically has been a good time to own and profit from stocks. Bulls also note that stocks have a history of climbing higher when most people are calling for the market to decline.