Stock Market Traits

Bull markets tend to start at the depths of pessimism the same way that dawn starts at the edge of darkness.

People have probably just been beaten up by a bear market. The phrase I m into stock investing is about as welcome in polite conversation as “I have a contagious disease.” If investors are avoiding stocks like the plague (or selling stocks they already have), share prices drop to the point that much of the risk is wrung out of them. Value-oriented investors then can pick up some solid companies at great prices.

The major media mirror this pessimism and amplify it.

Usually, the mainstream media have greater value as a counterindicator because by the time the major publications find out about the economic trend and report it, the major trend has already played itself out and is probably ready to change course.

For example, Time magazine featured Amazon.com CEO Jeff Bezos as its Man of the Year in 2000, but immediately thereafter, Amazon.com’s stock price continued a long and painful descent, ultimately dropping over 90 percent from its high in late 1999. Another example is the famous issue of Business Week with the pessimistic cover story titled “The Death of Equities” that came out at the tail end of the bear market of the 1970s. What timing an issue warning investors about the dangers of stock investing just before the greatest bull market in history started.

Economic statistics stabilize.

After the economy has hit rock bottom, the economic statistics start to improve. The most-watched set of economic indicators is called the Index of Leading Economic Indicators. Investors want to make sure that the economy is getting back on its feet before it starts its next move upward. In 1982, the economy was just starting to recover from the 1981 recession. The economic expansion (and accompanying bull market) became the longest in history.

Economic conditions for individuals and companies are stable andstrong.

You know that’s true if profits are stable or growing for companies in general and if consumers are seeing strong and increasing income growth. The logic holds up well: More money being made means more money to eventually spend and invest.

Industries producing large-ticket items hit rock bottom and begintheir climb.

After consumers and companies have been pummeled by a tough economy, they’re not apt to make major financial commitments to items such as new cars, houses, equipment, and so on. Industries that produce these large, expensive items will see sales fall to a low and slowly start to rebound as the economy picks up. In a growing economy, consumers and companies experience greater confidence (both psychologically and financially).

Demographics appear favorable.

Take a look at the census and government statistics on trends for population growth, as well as the growth in the number of business enterprises. The 1980s and 1990s, for example, saw the rise of the baby boomers, those born during the post-World War II period of 1946 to 1964. Baby boomers wielded much financial clout, much of it in the stock market. Their investment money played a major role in propelling the stock market to new highs.

General peace and stability prevail.

A major war or international conflict may have just ended. Beyond death and destruction, war is also bad for the economy and presents uncertainty and anxiety for stock investors.