With the stock market up nearly seven weeks running, and with many days being positive by 1% or greater, we're beginning to see investors come out of the woodwork again. We're also already beginning to see stock market apologists.
A headline yesterday proclaimed, "Stocks Shouldn't Rise Without a Cause." Yet, after a long bear market, that's exactly when stocks do rise -- when there isn't a specific reason. When there isn't yet sunshine streaming through the end of the tunnel. When headlines are still dripping with bad news, the gloomy words pooling on computer monitors everywhere.
Yes, we've had some good economic news lately, but the overall picture remains one of sluggishness. Today, even after three abysmal years, few if any big money managers are aggressively invested in stocks and awaiting a recovery. Instead, they're looking in the rearview mirror with worry. That's largely why stocks keep rising. Each day that the market rises, it draws in waiting money from the sidelines. A market climbs a wall of worry.
But already people are apologizing for the rise. "It's too much, too fast," "It isn't based on anything." It's even been said, "This is the bubble revisited." Everyone who's telling the market to "cool it" seems to be ignoring the fact that the stock market is a sloppy machine, has always been sloppy, and will always be sloppy. When I say sloppy, I mean irrational, emotional, or, to be positive, playful.
Valuation is a generality
Valuation -- let alone the valuation of a stock market en masse -- is far from a precise measure. The last century has taught us that, as a tool of reason, valuation will be hammered, twisted, molded, and reshaped time and again based on market sentiment, and market sentiment is anything but rational. Because we're not rational -- many of us are not.
Always remember that individuals buying and selling are what drive market prices. Now think about this: If one person out there is a so-called "irrational" and willing to pay a higher price for a stock than a so-called rational one would, it lifts that stock price and then another "irrational" person may decide to buy it, and so on. Until finally others capitulate. Rather than greed, call this hope. Hope can drive a market higher for months.
On the flipside, people sell at irrationally low prices, again in droves, because irrational people will push a price lower and lower, beyond reason, until the so-called rationals in the market start to crack and sell, too, making everything worse. All those stocks that were $3 six months ago and are now $15 -- those lows were due to fear. Rather than fear, call it terror.
So, the stock market is emotionally driven -- perhaps even first and foremost. Given this, it's not surprising to see a seven-week rise with strong momentum again, and although it's far too early to draw comparisons to 1999, the reasons for this rise are much the same as they ever are: emotion. It's the trend, the herd. It's hope sprung to life. A few good numbers, or a lack of bad ones, and hope rises.
I'm not saying this is right or wrong. Others are. Others are saying it's wrong -- "The market should not rise without a real cause." But why confront a deaf market with an argument of reason? The market will never change. People as herds will always drive the market and many people, if not most, are going to be emotional when it comes to money.
When the stock market is happy, it (or the people making it) justifies higher valuations. When the market is blue, everyone justifies below-average valuations. Between these extremes, the market swings and dips, based largely on news that seems big one day but is often forgotten the next. That's focused emotion driving stock prices. It's wrongly focused, since the long term is too often ignored.
Long-term is the only market sanity
The Fool rarely, if ever, talks about the market's direction, where it will head next week or year, and to those people who guess on this day after day, I have one question: How do you keep your sanity? And why haven't you given up already? Gluttons for punishment? Lovers of time wasted? Extremely slow learners? (OK, five questions.)
When will we accept that the stock market is a long-term investment vehicle, period, and stop guessing its daily, unpredictable oscillations? You're right. Never. People will never stop, as long as emotion doesn't die. So, the daily headlines will keep coming. One day will continue to look all-important to the market even though the next day is only hours afoot. That's daily emotion. That can cloud your decisions.
Well, not at the Fool. We keep our eyes fixed on individual stocks -- businesses -- rather than the swingin' stock market as a whole. To celebrate that, we've made it through three down years and we're now seeking great investments among the downtrodden, June is Stock Up for Summer month on Fool.com. It's time to get your portfolio in shape, if it's frayed on the edges. Perhaps it's time to buy some promising new stocks. It's time to stay rational, value companies, and buy carefully, because in an irrational market that is your one long-term advantage.
Nearly every day this month, visit the Fool for more articles than usual on stock picking and investment strategies -- and stock up for summer.
Learn how to get the most return for your money and tune up your portfolio in our new online seminar. Perfect Your Portfolio: Asset Allocation for Long-Term Wealth is now in session -- join us today and get your Portfolio Action Plan! (Jeff Fischer is one of the instructors.)