Confounded by a 2023 stock-market rally in defiance of rising geopolitical tensions, a mini banking crisis and widespread expectations of near-imminent recession? You’re not alone — and that’s the point.
The stock market’s resilience so far in 2023 is an example of a well-worn but sometimes useful market concept known as the “pain trade.” Tom Essaye, founder of Sevens Report Research, defined it succinctly in a Tuesday note: “The goal of the market is to extract the most amount of pain from the greatest number of people.” As he explained, that means when everyone is bearish, the pain trade will be for stocks to move higher. And when everyone is bullish, for stocks to move lower. “As such, the pain trade has been higher for all of 2023 and that’s helping support stocks despite decidedly mixed fundamentals (and mixed is being generous),” he wrote. Measures of investor sentiment help to tell the story. A month ago, in the wake of the failures of Silicon Valley Bank and other regional lenders, the widely followed CNN Fear and Greed Index tumbled to 28, deep in the “fear” category and just shy of “extreme fear,” Essaye noted. He added that the AAII’s Bulls/Bears Sentiment Index dropped to -2 …
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