The Wall of Worry Put into Perspective

The equity bulls often cite the old adage about the market climbing a “wall of worry” when propounding their bullish theses. I have no problem with the adage as such, but as a self-professed equity-basher (for now!), I have a problem with the application. Here, I explore the context in which this famous adage should be applied.


The Traditional Usage:


The preconditions for a “wall of worry” are a bullish price-trend and lots of worry. That is, when the prevailing price trend is strongly higher and the prevailing sentiment is decidedly worrisome, then it pays to embrace the price trend and to oppose the widespread conviction. That is, it pays to climb the wall of worry.


Gold & Equities:


On a 10-year timeframe, it is difficult to say that equities demonstrate the first condition – i.e. a bullish price-trend (see chart from Yahoo Finance below).


Chart of the S&P 500

Click to enlarge. Source:


There has certainly been some worry during this long-term, sideways market. However, even with this said, there certainly has been a great deal of worry about an imminent collapse in the dollar itself. So, as easily as one can say the S&P 500 is ‘climbing a wall of worry’, one can contend that the dollar (priced in S&P 500s) is ‘climbing a wall of worry’ (see chart of the dollar priced in S&P 500s below).


S&P 500 Price of Dollars

Click to enlarge. Source:


So, with the above in mind, lets review a good example: – gold.


Gold Price Chart

Click to enlarge. Source:


The chart above from shows the remarkably clear upward price trend in gold. And yet – by my perception at least – it has been criticized for the majority (if not the entirety) of its bull trend. Proponents of gold have often been ridiculed for embracing such a ‘barbarous relic’. Admittedly, the term ‘gold bug’ seems to be switching from a derogatory term to a badge of pride for some gold holders, but nevertheless, people in general seem to remain antagonistic towards gold.


The Generational Trend Applied:


The sentiment and price trends in gold and equities seem to be in keeping with the generational cycle (as is often described by the London-based hedge fund manager, Hugh Hendry). If you think about this, the generational cycle may be more significant than the usual financial hocus pocus. After all, at any time, the investment community at large is populated by (mostly) 25-60 year-olds. So, in 2011, this means that the oldest guys were born around 1950 and started working properly in 1975 (ish). The juniors were born around 1985 and only started to work recently. With the reasonable assumption that people tend to learn from their superiors, it should be evident that the majority of investment professionals have a ‘universe of experience’ that revolves around a general equity bull market (see chart below).


Dow Jones Since 1975

Click to enlarge. Source:


All the way up to 2008, ‘business as usual’ was business in an environment of persistent price rises. So, the vast majority of market participants are programmed – so to speak – to believe that equities always go up in the long-run and that whenever they decline you should buy them. It is conceivable that the foxing nature of markets will eventually create a generation of equity-haters. For this to happen, the younger participants in today’s investment industry will have to live through (and get hurt by) a stagnant or declining stock market (over a longer period of time). Once this has happened, and only once this has happened, will be populated by bullish musings.


Gold – of course – displays the inverse pattern.


Gold Price Chart since 1975

Click to enlarge. Source:


The older portion of the investment community remembers the events of 1980 all too well. Moreover, for a very long-time they had a time-series that corroborated their belief that ‘gold goes nowhere’ and that – hence – ‘gold is only for clueless gold bugs’. So, in keeping with their paradoxical nature, markets begun to build a bull-trend in gold at the turn of century. Arguably, the positive price trend in gold that is going on now is cooking up the expectation of a ‘golden asset’ (pardon the pun), that always goes up. After the investment community has been forced to embrace this bull-trend, then the opportunity to get bearish on gold will arise. For then – and only then – will the younger guys of today have the opportunity to repeat the mistakes of their fathers.


Some Indicators for Long-term Equity Investing:

When the people on CNBC and Bloomberg spend most of their time trashing equities, it is likely that some (if not all) of the following indicators will display rather bullish/cheap characteristics. When this is coupled with the important driver of natural private-sector re-levering, then it will be time to get levered and long the stock market.


The following video from Elliott Wave International shows the Dow Jones Industrial Average priced in gold. It is conceivable that the DJIA will trade for just a few ounces of gold by the end of this trend.


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The following two charts from show the P/E ratio and dividend yield of the S&P 500. Again, conceivably by the end of this trend, the S&P 500 will be trading at 5-10 times earnings and with a high single-digit yield:


S&P 500 P/E Ratio

Click to enlarge.

S&P 500 Dividend Yield

Click to enlarge.


Finally, see the mutual find cash position chart from Elliott Wave International. The time to buy equities will be when they’re completely shunned by professional investors in aggregate.


Mutual Fund Cash Position

Click to enlarge.




The wall of worry adage is only valid when there is a prominent wall and lots of one-sided worry. Equities – I contend – do not fulfill these criteria whereas gold does.

See here for our collection of rare historical economic data.

Posted May 15, 2011