Why the Stock Market Rally Is Bad News

What Triggered This Week's Rebound in Stocks?

U.S. stocks had their biggest rally in a year on Oct. 21. The S&P 500 has now recovered in a blink: a 5 percent rise since Oct. 15, reversing a 7.5 percent drop.

Bummer. Long-term investors barely had a chance to jump on one of the market’s best buying opportunities in years. They've been waiting for discounted stocks for a long time. The S&P 500 hasn’t had a bargain bin since a couple brief drops in 2012. Neither met the definition of a correction, a drop of 10 percent or more. The last extended double-digit declines were in 2011.

“I love bear markets,” says Julie Werner, a 61-year-old amateur investor from Warner Robins, Georgia. Unfortunately, stocks’ biggest declines were on Oct. 15 when she was two hours away in Atlanta, shopping and visiting friends and family. “All day [I was] really regretting I wasn’t at home to put some buys in.” She did buy a couple days later, but by then markets were recovering quickly.

Falling stock markets may stress out traders and threaten the bonuses of executives and professional investors. Even cool-headed portfolio managers can risk their jobs or reputations buying into a market crash.

But regular investors, especially those saving for retirement, have an advantage over the professionals. It's not rocket science: They can afford to be patient. By buying in good times and bad, they benefit from gradually rising markets. And it’s the bad times that deliver the most oomph to their portfolios. By buying extra when stocks drop – as Werner did in 2008 and 2009 – they’re following the advice of a dozen Warren Buffett quotes, like: “Be fearful when others are greedy, and greedy when others are fearful."

The strategy doesn’t work if those other investors never get that fearful. Blame the Federal Reserve for propping up the markets, or plain old exuberance. When stocks started to drop this month, investors barely flinched. “They did not seem to care much,” says David Santschi of TrimTabs Investment Research, based on his firm’s mutual fund flow data.

Individual investors can reassure themselves that someday, surely, stocks will take a tumble. Maybe new economic data or earnings news will spook the market again. Of course that might be at much higher prices.

The only other consolation is economic. A stock decline doesn’t always predict a recession -- 1987’s epic drop barely registered – but a strong stock market is a sign the U.S.’s five-year-old economic recovery may still be on track. So while it's not a time of great investing bargains, Americans may be more likely to keep their jobs. And maybe they’ll even get a raise.

More stories by Ben Steverman:

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