Feb 22, 2023 04:50 PM

Fisher: Why ‘Selling the Rally’ Will Make You Sorry

Photo: VCG
Photo: VCG

Time to sell? With Chinese stocks soaring since October’s low, now may seem like the perfect moment to jump ship — after the market has recouped a chunk of 2021 and 2022’s declines but before another scary plunge strikes. Late January and February’s wobbles heighten the temptation. Selling feels safe! But it isn’t. History shows there is nothing prudent about ditching stocks after new bull markets’ initial bursts. They typically roar far beyond those gains—leaving premature sellers sorry.

In November, I told you the biggest risk for Chinese investors wasn’t Covid, real estate woes or tech regulation — it was being on the sidelines when a new bull market took hold. If you possessed the steely resolve to stay invested then, great! Now is no time to lose that gumption.

Yes, headline worries remain. Global recession chatter continues, Covid still lurks — and now fears grow of escalating U.S.-China tensions after the balloon incident. But worries always remain after scary bear markets—sometimes lingering for years! Prior plunges put everyone on high alert — especially those who endured the painful drop. This hyperfocus on potential threats is part of the pessimism of disbelief I detailed in July.

But while people mind widely known worries, stocks don’t. They pre-priced them already, then weigh emerging realities against them, as I detailed in November. These fears form the bricks in the “wall of worry” every bull market proverbially climbs, as one after another well-known fear proves false or overwrought. Even so-so realities top horrid expectations. Stocks soar.

You are seeing early stages of that now. Consider: While December’s 1.8% year-on-year decline in retail sales wasn’t great, it smashed Western analysts’ dreadful expectations for an 8.5% drop. Similarly, four-quarter GDP slowed to a 2.9% year-on-year increase, but that still beat forecasts of a paltry 1.8% gain. The Caixin/Markit Manufacturing Purchasing Managers’ Index edged into expansion territory, too, with the biggest factory output increase in a year — also topping expectations. Positive surprises, far and wide!

Meanwhile, fears of a global recession that would whack Chinese exports — which I said months ago looked unlikely — now appear woefully wrongheaded. U.S. GDP grew 2.9% annualized in the fourth quarter. Its January PMIs were mixed — not weak. The much-maligned eurozone even eked out positive growth in the four-quarter. Its manufacturing PMI contracted in January, but the much more important and larger services gauge signaled expansion. Nothing here suggests a deep downturn looms.

Meanwhile, white-hot inflation continues cooling globally. Despite some fears, there is little in China’s CPI or factory-gate price measures suggesting it will surge in your country. These classic early cycle positive surprises underpin global stocks’ rally since last autumn’s lows.

Expect more. History shows stocks typically climb much higher after bull markets’ first few months of gains as the parade of upside surprises processes. Since the start of good data in 1993, the MSCI China Index has enjoyed eight full bull markets. The median gain: 107.8%, versus a 59.0% median decline in nine bear markets. Each of the four strongest bull markets followed one of the four worst bear markets, when expectations were bludgeoned — like now.

Only one bull market — the anomalous, Covid-shortened one from 2019 to 2020, featured gains less than 69%. Meanwhile, the strongest featured a 622% rise — that was 2003-2007’s rocketship ride.

Worries ran rampant early in all of those bull markets, like now. Take 2011 to 2012. Western commentators shrieked about a “hard landing” for China’s economy. They spun far-flung tales of eurozone debt contagion crushing Chinese exports and draining European capital investment in the Middle Kingdom. None of that happened. Or look at 2016. Well after that year’s market low, U.S. headlines fretted everything from a Chinese “debt hangover” to American steel duties slamming Chinese exports. They worried any slowing of government stimulus would squash the rally. Stocks shrugged — and soared.

Recent history may skew that perception, leaving Chinese investors biased to expect downside. After all, Covid’s emergence cut short 2019-2020’s rise and the last two years’ bear market was abnormally long. But typically bull markets outlast bear markets — by far. Their median length of 22.4 months nearly doubles bear markets’ 11.9 months.

Big trends are always global — and bull markets’ longer and stronger history runs global, too. Take the U.S. Since good data begin in 1925, American bull markets have lasted a median 53 months, nearly tripling bear markets’ 18 months. Returns between U.S. bull and bear markets are stark: median gains of 158% versus median declines of 28%.

Of course, those figures aren’t predictive or some roadmap for what is assured to happen. But they point toward Chinese stocks still being in a new bull market’s early phase — making selling now doubly dangerous. Why? The magic of compounding. In November, I told you Chinese stocks averaged a 27.4% rise in the first three months after bear market bottoms. This time? Even better. They jumped 41.2% in the first three months after October’s low. If stocks keep rising, as I expect, those initial gains will compound throughout the life of the bull market — powerful portfolio fuel. If you miss out on those early second-phase gains, they are very difficult to recoup. You let compounding’s unseen power fizzle.

Selling after early bull market bounces may feel good initially, but it raises a dangerous question: When do you get back in? Waiting for scary stories to subside before doing so likely leaves you waiting … and waiting … and waiting. Look no further than 2020 and early 2021. When did skies fully “clear” after the Covid-tied bear market? They didn’t! Fears of second waves — as well as third, fourth and fifth waves in some regions — rolled right into one another.

Yet the ensuing bull market brought nearly double the gains stocks have enjoyed since October — and it was one of China’s shortest. Those who sold early in the 2003-2007, 2008-2010 or 2016-2018 bull markets and waited for rosy outlooks to return missed crucial gains that compounded far longer. If you wait for crystal clear skies, heed the words of American investing legend Warren Buffett: “The future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.”

The worries that loom over every bull market’s early bounces are simply part of the price equity investors pay for stocks’ powerful potential returns. Don’t let 2021 and 2022’s pain cloud your outlook for 2023 and beyond.

Ken Fisher is the founder and executive chairman of Fisher Investments.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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