March was nice, but April was nicer

I wanted to quickly recap April’s market performance. For the month, the MSCI ACWI (All-Country World Index) rose +11.8%, one of the best monthly performances in history. Tacking on March’s +8.2% rise, we now have a 2-month rally that’s totaled +21.0%. And since its March 9 low, the MSCI ACWI has soared +31.1%.

Despite this stellar performance (or perhaps because of it), many investors are worried. Are stocks moving up too fast? Could this just be another of those bear market “head fake” rallies that will give up the ghost as did several prior ones? These fears are not unfounded, as there’s been a lot of bad news recently, and much more still to come. Add to that the recent outbreak of Mexican swine flu, and there’s plenty to worry about.

But as I’ve said so many times before, bear markets climb a wall of worry. The time for successful investors to be brave is when most others are scared. And the data continue to suggest that the majority remain bearish and afraid:

“In this week’s latest survey of Investment Advisors, according to Investors Intelligence, more advisors are bearish than bullish. In fact, for the past 4 weeks the number of bullish advisors has been falling as the market has moved forward. Basically the market continues to climb a wall of worry. While earnings have been poor as everyone was expecting, the surprise has been that in many key places, they haven’t been as bad as expected....

“With the majority of advisors not believing in the rally, probably means it still has more room to move on the upside over the coming weeks.”

(The above is from STIR Research, whom I’ve quoted before.)

If my recent conversations are any indication, most of you feel the same way, much more afraid of another drop than of missing the new bull market. All this pessimism is good, and adds to my confidence that the lows are finally behind us. Much data, moreover, are suggesting an end to this recession sooner than most had thought. It looks like we won’t have to wait until the end of 2009 for the economy to start growing again; that could happen as soon as next quarter. No, the stock market isn’t crazy, it’s just doing its job, which is to discount the future.

A note on swine flu: Even if we do see a global pandemic, the social and economic toll are likely to be significantly less than in prior ones, and certainly nothing like what we saw with Spanish flu in 1918. And even during that horrific period, when over 20 million people died worldwide, the Dow Jones Industrial Average gained +26.4% in the year following the month during which the pandemic first started to mushroom. Strange as it may seem, pandemics are not necessarily bad for stocks.

But today’s situation is far different from 1918, and even from the other, smaller, flu pandemics of the 20th century. First, the new virus was identified early, and public health measures have been quickly put in place worldwide. Second, the current swine flu virus doesn’t appear to be any more virulent than normal flu, in sharp contrast to the 1918 Spanish flu or the recent avian flu. Third, we have the ability to make vaccines today, though it will be several months before one is available. Fourth, we have 2 antiviral drugs in ample supply that are highly effective in reducing symptoms of the virus. Fifth, new research indicates that the majority of deaths from Spanish flu were from bacterial pneumonia superimposed on the original virus, for which we have safe and effective antibiotic treatment today.

Most of the people who die or become seriously ill from flu virus are the elderly and the infirm; most children who succumb have ongoing medical problems. Healthy children and adults typically come through the illness unscathed, even without antiviral drug treatment. And the bulk of the economic effects of a pandemic come not from the illness itself, but from attempts to reduce the spread of the virus. Quarantines (both voluntary and imposed), work absences, reduced travel and shopping, can all contribute to an economic slowdown. The key is to protect yourself without becoming a drag on the economy.