Terrible Things Happen All Of The Time And The Stock Market Keeps Going Up

Dr. Ed's Blog

After an incredible 5-year bull market run, which saw the S&P 500 double from its March 2009 low of 666, many stock market watchers were sure this would be the year that things would finally turn.

There certainly has been no shortage of bad news that would cause investors and traders to sell.

"Just this year alone, the list of anxiety-provoking events has been a long one: Emerging markets mini crisis (January 23), Crimea invasion (February 28), Yellen rate-hike scare (March 19), momentum stocks meltdown (April 3), ISIS invasion of Iraq (June 10), Portuguese bank panic (July 10), Malaysian jet crisis (July 17), sanctions imposed on Russia (July 29), and the global growth and Ebola scares (September 30)," writes stock market guru Ed Yardeni.

"And the year isn't even over yet."

Yardeni's listing of bad news echoes of Warren Buffett's New York Times op-ed from the darkest days of the financial crisis in October 2008. Here's an excerpt:

...A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497...

Unexpected tragedies and disasters are just a part of life and investing. This doesn't mean the stock market won't crash tomorrow or next. All this means is that investors should never be surprised to see stock prices rise amid horrible news.

Keep in mind, stocks are a discounting mechanism, which means much of their value is derived from expectations for the future, not the news of the present.