Investors are disheartened by the stop-start progress of the stock markets over the last two years but I think that there’s a silver lining to this — it has kept the markets honest. There are many ways for a market to be dishonest but the one I’m referring to is the tendency for sectors and stocks to get inflated without any justification. The repeated small setbacks that the broad markets have faced since mid-2009 have tended to be regular deflators in such cases.
Whenever there has been an unalloyed bull-run for a couple of years or more, some sectors and some stocks have had unlikely stories spun around them. We’ve had long bouts of story-led waves of investing which have resulted in investors buying into stocks that have turned out to be decidedly poor investments.
One of the great things about the period since mid-2009 has been that nothing of the sort has taken hold. There’s not really much to complain. Since June 12, 2009, when the markets were through with the initial post-election rally, the large-cap indices are up about 17%, taking into account the recent declines. This is a healthy gain. What makes it healthier is that it is gradual and has been punctuated by periodic declines.
In each decline, any incipient signs of irrational exuberance have been stamped out. Despite the general gloom, I’m quite positive about the way things are going. The period since June 2009 has been one in which we have had steady and justifiable gains at a very reasonable rate.