We all know that the stock market has been rising for 3 years. Many economic measures — unemployment, consumer spending and confidence, etc. — also show strong improvement. Yet is that a good reason to stay bullish on stocks?
What a silly question, some people might say. But before you give a reply, please take a look at these financial news headlines — and then guess when they were published:
- Fed chief predicts economy will rebound despite housing woes (AP)
- IMF predicts an energetic world economy (StarTribune.com)
- US Treasury says economy strong…? (Reuters)
- Job Growth Strengthens Economy (Washington Post)
- Several Signs the Economy Is Reviving (New York Times)
Did they publish this week? Last week? Last month? No. All published in mid-2007, right before the global financial crisis cut the DJIA by 54%; S&P 500 and CRB Commodities Index by 57%; oil by 78%. Gold, emerging markets, and real estate also fell hard. Even bonds were no “safe haven,” as 2009 was the worst year on record for U.S. 30-year Treasury bonds and 10-year T-notes: down 26% and 9.7%, respectively.
This chart shows you just how mistaken all that “strong fundamentals” optimism really was (courtesy: Bloomberg):
The lessons are obvious:
- Don’t be lulled by “improving fundamentals.” As EWI president Robert Prechter points out,”You can’t say, ‘The economy looks good, so I’m bullish on stocks.’ This approach…doesn’t work at the turns.”
— March 2012 Elliott Wave Theorist
- The stock market knows how to surprise the unprepared majority of investors. It’s never too soon to safe-guard your capital.
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This article was syndicated by Elliott Wave International and was originally published under the headline Capital Safety: Is There Such a Thing as “TOO Safe”. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.