The last time things looked this bad — even worse — was three years ago, hard on the heels of the bankruptcy of Lehman Brothers, with global markets plunging and the financial crisis still unfolding. The following year the Standard & Poor’s 500-stock index gained a robust 23.5 percent. What explains the paradox? Efficient market theorists would say that all the bad news and pessimism about the future are already reflected in stock, bond, real estate and other asset prices. Market prices are in large part predictions, not snapshots of the present. So-called contrarian and value investors, like Warren Buffett, have argued that pessimism is often overweighted in asset prices, which makes widespread gloom a bullish indicator. Mr. Buffett went on one of his largest stock buying sprees this last year, even as the economic news worsened. These views have been validated by recent research in the field of behavioral…   More →