It’s funny how emotions and psychology influence us all as investors. Depending on one’s personality type, investment time horizon, future outlook, and current general state of mind, one can be desperately bearish or exuberantly bullish in the same stock market environment.
What investor’s have been through over the past 2 years is nothing short of one of the steepest, gut wrenching stock market declines ever. The S&P 500 index plunged from an all time high of around 1,562 in October of 2007 down an astonishing 57% to around 666 in early March of 2009. Most of this precipitous decline came after September 15, 2008 when global financial services firm, Lehman Brothers Holdings Inc., which was founded in 1850, filed for Chapter 11 bankruptcy marking the largest bankruptcy in U.S. history.
Since early March a fairly significant relief rally has been built on the back of optimism for economic stabilization, and mild recovery. The market seems to be telling us that the next great depression and other worst case scenarios have been ruled out. The financial system is not collapsing, and some sparse ‘green shoots’ of recovery are starting to poke through the dirt and dead matter that toxic debt and upside down mortgages have left strewn around the world. The S&P is now up a full 30% from the depths of March. Some financial stocks like Wells Fargo, General Electric, and Manulife Financial are up as much as 156% from their single digit lows. If that wasn’t the bottom, this is a ride that investor’s will probably want to get off of.
For long term investors that were buying stocks as they fell, or maybe well into the market bottom they took heart in the fact they were buying when pessimism was abound and stocks were surely cheaper than they were at any time over the past decade. How those same long term investors are feeling now that stocks are 30% to 156% more expensive in the case of Wells Fargo is how psychology really wrestles with us as investors. I would imagine that many investors are now feeling frozen, and their appetite for buying into this market has waned. It is a little bit like a deer in the headlights, or better yet a deer that just got hit by a semi and survived.