3 reasons why stock market optimism always wins

For many people, 2020 has been the worst year ever. Still, the stock market is doing well, and that leaves many investors confused. Why the disconnection?
There are a lot of things that go into stock market behavior. In general, however, there are a few things that give the market its positive trend – and reasons why stocks can continue to rise even when bad news seems to be all over the place.
How the market behaved on Thursday
The optimism of the stock market was again manifested on Thursday. At first it looked like there would be another losing day for the major market benchmarks. Yet at the end of the day the Dow Jones Industrial Average (DJINDICES: ^ DJI), S&P 500 (SNPINDEX: ^ GSPC), and Nasdaq Composite (NASDAQ INDEX: ^ IXIC) were all up, with the Nasdaq leading the way higher.
Today’s stock exchange
Index |
Percent change |
Point change |
---|---|---|
Dow |
+ 0.15% |
+45 |
S&P 500 |
+ 0.39% |
+14 |
Nasdaq Composite |
+ 0.87% |
+103 |
Data source: Yahoo! Finance.
As cases of COVID-19 are on the rise and the threat of political instability seems to increase every day, days like today seem incomprehensible to many people. Yet savvy investors don’t let emotions rule their decisions, whether it’s buying into a rally for fear of missing out or staying out of the market just because things look dire. There are actually good reasons why markets are able to move up in difficult situations.
Image source: Getty Images.
1. We are already out of traffic
Investors learn from experience, and one of the most painful experiences one can have is miss a big market rally because the conditions didn’t look very good. Think back to these events:
- After the stock market crash of 1987, many questioned whether the US economy would return to the poor conditions of the 1970s. Instead, things improved quickly and stocks rebounded quickly.
- The bear market from 2000 to 2002 combined the bursting of the tech bubble with the attacks of September 11. Yet although similar threats to national security still persist today, markets have rebounded from their worst levels and posted solid gains.
- Many believed that the financial crisis of 2008 and 2009 would lead to the collapse of the banking system. Thanks to the efforts of policymakers, lawmakers, and average Americans, what followed was a 10-year bull market and one of the best performances the stock market has ever seen.
There are only a limited number of times you can see such things happen before you are convinced of the long-term path of the stock market. When this happens, any tough situation becomes a buying opportunity.
2. Innovative companies find ways to overcome adversity
The first part of 2020 provides a great example of how stocks can cope with the unexpected. No one anticipated a global pandemic, but many companies have been able to take their products and use them in new ways to help people cope. This caused their shares to skyrocket, offsetting losses in shares of other companies.
Some businesses are more stable than others, but every business should be aware of the potential disruption. The fact that so many people are successful is a testament to the resilience of the stock market – and that’s another reason to feel confident with your investment.
3. We have a direct societal interest in the stock market
That last point is a bit esoteric, but it basically boils down to this: The financial well-being of millions of Americans rests on the stock market as an institution. Therefore, societal institutions fight back when the stock market faces a systemic threat.
We saw this during the financial crisis. Many people were appalled at the efforts of various executives to prop up the stock market at a critical time, arguing that financial institutions should have been allowed to go bankrupt. Whether you agree or not, the point is, Wall Street got that support. This base of support reduces investment risk and makes stocks more attractive.
Be pragmatic in your optimism
As a natural pessimist, I understand how difficult it can be to see what’s going on in the world and I think now is a good time to invest in stocks. But I am also pragmatic. When history repeatedly proves that market pessimists are wrong, it makes sense to take a more positive view. Whether you do it or not, you can count on others to do it and benefit from their decision.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.