The Business Insider has an interesting gallery of prominent analysts who called the stock market rally since March a "bear market rally" and advised clients to take money out of equities. Here's a graphical representation:
Not surprisingly, the bears who most accurately predicted the crash, such as Nouriel Roubini, John Mauldin, and David Rosenberg, were also among the first to call the rise in stocks a "sucker's rally."
This week, the Dow triumphantly crossed the 10,000 mark amidst optimism on Q3 earnings. But what has changed since March? Bears had good arguments for why the upside of stocks was limited--more credit and housing losses yet to come, a deflationary spiral for asset classes, rising unemployment, weak consumer spending, etc. Now, eight months later, consumer spending has generally come in weaker than expected, unemployment has continued to increase, and housing faces a huge oversupply. Even during this current earnings season, JPMorgan, Bank of America, GE Capital, and other banks have increased provisions for bad assets. Sure, GDP and earnings have beat expectations, but the general economy still faces strong structural problems. I have not seen any evidence since last March that made me think, "Oh, things are much better than we think."
My question is, how did public opinion change so fast from excessively negative to excessively positive? I found my answer this week in a post from Yves Smith at Naked Capitalism.
In his post, Yves describes how the psychological principle of social proof relates to the general perspective on the state of the economy. Yves argues that media coverage of the economy fell significantly after February, after which most news focused on good surprises rather than negative ones. The good news of the stock market effectively became a proxy for the economy for many Americans. Humans rely on heuristics to draw broader conclusions. We also have an enormous difficulty disagreeing with consensus.
A study from the Pew Research Center concluded the media has focused on three main stories: reviving the banking sector, the auto industry, and the stimulus package. Interestingly, 46% of overall news coverage in February and March focused on the economy. But from April to June, this number fell by half to 21%. In July and August, it fell even further to 16%.
It is intuitive that regulation increases with public outrage. As I've noted several times, it was the worsening of the situation for the general public that drove reforms in 1934, not Congress itself. As the stock market has surged, people's perception of the economy has improved, especially as it has gotten less attention in the news. The news seen by normal Americans (i.e. CNN, Fox, MSNBC, CBS, ABC, NBC) rarely reports on anything economics related apart from stocks.
Some quick research on google trends confirms my suspicions. In March, searches for "recession" notably dropped:
The same goes for bonus:
And deflation:
It would seem from analysts' warnings of a "sucker's rally" that, in this case, analysts were the suckers and not those holding stocks. But if the increase in stock prices decreases public will for reform, then the real suckers will be the American people, no matter how high stock prices go.
