Stocks are up more than 100% in three years. Why the hate?

By John Waggoner, USA TODAYUpdated 2h 28m ago

The bull market, now entering its fourth year, has given lots of love. The Standard & Poor's 500-stock index has risen 108% from its bottom on March 9, 2009, through the end of the first quarter. It rose 12% the first quarter alone.

Alejandro Gonzalez, USA TODAY

Mutual fund investors haven't been left out. The average stock fund jumped 13% in the first quarter, the best showing since 1998. The top-performing fund, an exchange traded fund that makes highly risky bets on the price of natural gas falling, soared 105.6%.

So why doesn't anyone love this market?

RESULTS: How the largest stock mutual funds fared
STORY: Tech funds post electrifying 20.3% gain in first quarter
STORY: Fundline: You may want to avoid the top 1Q fund winners
Investors have yanked an estimated $173 billion from open-ended mutual funds since March 2009, according to the Investment Company Institute, the funds' trade group. "This is one of the most disbelieved, distrusted and, in some cases, hated markets we've ever seen," says Bob Doll, chief equity strategist for fundamental equities at BlackRock.

Skepticism about a rally is normal, at least for the first six months or so. But three years?

"Every bull market is born in the depths of doubt," says Jim Stack, publisher of InvesTech Market Letter. "But what makes this so unique is that there's so much distrust of it." Why the hate?

•Bitter experience. Investors have been clobbered by two massive bear markets in 12 years. The 2000-2003 bear market ripped 49% from the S&P 500. It was the worst bear market since the Great Depression— until the 2007-2009 bear market roared in. The S&P 500 plunged 57% during the last bear market.

USA TODAY'S 2012 FUND REPORT
The average stock mutual fund jumped 13% in the first quarter of 2012.

How the largest stock mutual funds performed in the first quarter
First quarter's best and worst funds
Best funds of the last 5 years
How fund categories fared in 1Q
"The whole 2007-2009 bear market took the confidence away from everyone," says Christopher J. Cordaro, a financial planner in Morristown, N.J. "What they're asking for now is, 'Can I have one of those CDs that pay 5% again?' Unfortunately, those don't exist anymore."

•Volatility. Although the first three months of 2012 were fairly placid, the last six months of 2011 were terrifying at times. Last year, the S&P 500 fell 3% or more six times, and on one heart-stopping day in August, 6.7%. "Everyone was saying, 'I told you so! I told you so!' " says BlackRock's Doll.

•The Federal Reserve. An ancient saying on Wall Street is 'Don't fight the Fed' — meaning that when the Fed aims to stimulate the economy, it generally does. The Fed stimulates the economy by lowering short-term interest rates, making it cheaper for companies and homeowners to borrow.

The Fed has kept interest rates near zero and has bought long-term Treasuries to keep rates down. "Is the market up partly because of that? Absolutely," Doll says.

But some investors are deeply worried that the Fed's actions will lead to inflation — and high inflation is bad for nearly every asset, with the exception of gold. Others think the country is simply headed down the wrong path. "Optimism has left the room," Cordaro says.

Investing a bit at a time
Here's what you'd have today if you had invested $100 a month in the largest funds, ranked by assets.
Fund 5 years 10 years

Vanguard Total Stock Market Index $7,708 $17,046

Growth Fund of America A $6,819 $16,511

Vanguard 500 Index $7,624 $16,544

Vanguard Institutional Index $7,625 $16,558

SPDR S&P 500 ETF $7,605 $16,431

EuroPacific Growth A $6,178 $17,024

Fidelity Contrafund $7,848 $19,000

Capital Income Builder A $6,522 $16,381

SPDR Gold Shares $9,656 new

Income Fund of America;A $6,916 $16,819

Amount invested $6,000 $12,000

Dividends, gains reinvested through March 31. Source: Lipper.
Oddly, market strategists view such ugly feelings toward the market as a positive. Market tops occur when the world loves the stock market. After all, when everyone loves stocks, there are no new investors left to buy stocks and push prices higher.

Currently, about 50% of investment advisers are bullish, according to Investors Intelligence, which tracks sentiment. Readings above 55% bullish are generally considered over-optimistic. "This is a healthy reading for a rising market," says John Gray, editor of Investors Intelligence.

And the market just doesn't seem to have the frothiness needed to spark another bear market. "Stocks are reasonably cheap compared to the alternatives," Doll says. Stock prices, relative to earnings, aren't unreasonable.

Sure, there are potential problems out there. The Middle East remains a tinderbox, and oil prices are pinching consumers. But the world is always worrisome. "It's a very short-sighted mind-set," Cordaro says. "Did we make it through World War II? Korea? Vietnam?" Each time, he says, the stock market came roaring back.

And investors who have missed the bull market so far can cushion themselves a bit by reducing exposure to bank stocks, which have been the cause of much of the market's first-quarter rise, and tech stocks, which have been leaders for much of the past 12 months. "They have run up the most, and if there's a correction, they will correct the most," Stack says.

Stocks are up more than 100% in 3 years. Why the hate?