Don't Worry About the "Wall of Worry"
The idea that bull markets climb a "wall of worry" can be confusing. This “wall” is, of course, not a literal wall. Rather, it is the collection of worries held by market watchers and participants that conditions are ripe for stocks to decline. It's natural to wonder: If there is so much to worry about, why is there a bull market?
It helps if you can think of a bull market as a process rather than an event. The process is one whereby the great majority of investors are gradually converted from skeptics (that stocks are going to go up) to believers. This takes time.
In the beginning, the evidence is not particularly strong. Nevertheless, stocks can begin to rise because the selling is essentially over. Everyone who wanted to sell as a result of the bear market has done so. Even a small number of buyers can begin a new bull market if there are essentially no sellers.
As prices begin to rise, most of the skeptics hold to their doubts (the "wall of worry" is in place), but a few begin to believe that better times are ahead. As skeptics incrementally convert to believers, demand for stocks slowly builds and prices rise to a new recovery level. In turn, this rise in prices reassures more skeptics, converting them into buyers. Prices rise further, reassuring still more skeptics. And so it goes. A bull market is a process whereby skeptics are gradually converted into believers.
When all the skeptics have been converted — that is, when the "wall of worry" has been conquered and pretty much everyone agrees that stocks are going higher — the bull market is over. Why? Because there are no more buyers. Everyone who wants to buy stocks has done so. At that point, the stage is set for a bear market where believers are slowly transformed back into skeptics. That's why the "wall of worry" is a good sign. There are still skeptics out there who are the potential converts who will provide buying fuel for further moves to new recovery highs.
[insert Sound Mind Investing tag info/graphics from last article, "Trusting God to Work Things Together fo Good"]
Originally published December 16, 2003.
