Stocktake: Optimism pays better than pessimism for market players

Stocks have rebounded strongly lately but we often see snapback rallies in bear markets. Is this a bear trap, a sucker’s rally that will engender hope before turning lower?

Bears often point to history in this regard, noting the innumerable bear market rallies during the global financial crisis and the 2000-02 dotcom bust.

This is true, but it's equally true that many rebounds keep on going. The S&P 500 hit technically overbought levels last week, having ascended 11 per cent in a fortnight. However, LPL Research's Ryan Detrick notes similar periods of strength in November 2020, April 2020, October 2011, July 2009 and March 2009, all of which turned out to be good times to be buying stocks. Similar data is cited by Schwab's Liz Ann Sonders.

Still, it generally pays investors to suspend their doubts at times like this. According to MarketWatch data, the S&P 500 has enjoyed a median gain of 11.5 per cent a year after exiting a correction, rising 77 per cent of the time.

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Will this time be different? Maybe. Rising rates, inflation, war and ongoing geopolitical uncertainty – there’s certainly no shortage of reasons to be concerned.

Still, investors shouldn’t assume the recent bounce is a sucker’s rally. More often than not, optimism pays better than pessimism.