Two things you can count on in addition to death and taxes are investor complacency during periods when volatility recedes and frustration at bearish analyst prognostications which aren’t borne out in fairly short order.
I shouldn’t have to say this, but I occasionally do: Nobody knows anything about economics and markets. Not really. Warren Buffett knows the most precisely because he admits he doesn’t know much.
Given that, you shouldn’t take anyone’s opinion as gospel. Economics is a soft science, and markets are human creations beholden first and second to irrational human impulses (fear and greed) and the vagaries of systematic flows, and only a distant third to any sort of “fundamental” factors.
Market participants have a demonstrable tendency to act aggrieved or surprised when serious analysts and strategists turn out to be wrong about the near- or medium-term trajectory of asset prices. This manifests most acutely in a kind of disgusted despondency when someone serious who’s very smart persists in a bearish bent for too long with no accompanying equity drawdown to validate the thesis. (If only investors treated unserious analysts, websites dedicated to bearish agitprop and related social media accounts the same, the world would be a saner place. Alas, being avowedly unserious inoculates you from criticism.)
Allow me to offer a helpful reminder: Everyone’s just guessing. If you’re trading based on something you read online or some analyst note you stumbled across, you’re the silly one, not the person who made a “bad” call. There are no “good” calls in economics, just lucky ones. Larry Summers has had a run of good luck lately, for example. Hedge fund managers will swear they make good near- and medium-term market calls all the time, but Buffett would tell you he doubts it, or at least in the context of how the same people would’ve likely fared (i.e., better) over decades had they simply sold a bunch of deep OTM puts on an index and plowed the premium into an index fund.
There are, of course, educated guesses, but I’d submit (consistent with Buffett and Charlie Munger) that even the most informed projections are just as likely to be wrong as right. If you don’t internalize that, you’re going to find yourself frustrated at regular intervals, and not just in the context of macro and markets.
I say all of that because some well-known, top-down equity strategists are bearish right now and have been for some time, a “wrong” call given that equities haven’t revisited the October lows, and may never. Because the general investing public won’t acknowledge the simple reality espoused routinely by Buffett, investors tend to lose faith in smart people for the “crime” of incorrectly forecasting the near-term direction of lines on screens — lines which, at least over short timeframes, represent little more than fear, greed, gambling and the volatility-sensitive whims of hair-trigger, headline-scanning algos.
Instead of becoming aggrieved yourself, or, if you’re not aggrieved, becoming complacent in the face of subdued volatility, it’s better, I’d argue, to stay engaged over the summer and accept educated commentary from market veterans for what it is — the best guesses of people who do “this” for a living, and who have for a very long time. Whether they’re strictly correct about next month’s SPX levels shouldn’t really concern you, even if it surely concerns them.
So, to ask the questions I’ve been asked on enough occasions of late to be somewhat annoyed by them: Why haven’t stocks sold off? Why is the recession not here? Why have so many smart people been “wrong” in 2023?
Well, one smart person who describes himself as a “patient bear” in a world of impatient bears has some answers.
“While US GDP growth [was a low] 1.1% in Q1, nominal GDP was 5%, very strong [and the] best reason why nominal EPS continues to defy expectations of a big decline,” BofA’s Michael Hartnett wrote, in his latest.
But what about Fed hikes? Is ~500bps in a year and, now, bank failures, not enough to cool nominal growth? If not, why not?
“It’s a very unusual cycle,” Hartnett calmly remarked, citing “pandemics, wars and so on.” Given that, history is a “much less reliable guide [and] lead, lag times between monetary policy and economic impact are highly unlikely to be normal.”
But it’s not just that, “fiscal policy remains very stimulative,” he went on, citing US government deficits and government spending, before reminding investors that labor markets across the G7 remain “extremely tight.”
Being the “patient bear” that he is, Hartnett isn’t giving up. The “expected macro and market chronology of the past 18 months has been interrupted,” he wrote, but BofA is still bearish. Equity upside, he suggested, is capped.
“[The] economic ambiguity of 2023 is set to end with a crack in the labor market and an EPS recession,” Hartnett emphasized, reiterating that the S&P is a fade beyond 4,200 given that stocks are pricing in just a 4% drop in earnings and 210bps of rate cuts peak-to-trough.
It’d take a “dramatic fall in wage inflation” to get a soft landing, he said, summing up. If you ask BofA, the risk of a hard landing for earnings, or a no landing for interest rates, “remains high.”
So, try to be patient with your bears. The earnest, serious ones, anyway. They might be right eventually.
Oh, and coming full circle, never let subdued volatility lull you completely to sleep. Try to stay mentally engaged. Even if it’s “summer in April,” as one US rates strategy team recently joked. Stability breeds instability, after all. And that old saying about “idle hands” applies to idle minds too.
Considering all that’s going on, the current vix level does seem quite low, reinforcing the case for the classic “sell in may and go away” this year.
But then again, and as you rightly point out, who knows?
Well put and a good reminder. Thanks.
I guess a majority of investors and policy makers still believe that economics is a science which can explain and predict the unknowable. Humans crave explanations and order. It can be hard to adopt a more Zen approach but it is liberating if you can do that.
Now I need to hop and write a diatribe about how the market is wrong!!
Maybe I’m crazy, but the lack of a serious pullback doesn’t surprise me. I’d be willing to bet wage inflation for a large chunk of the S&P 500 (by weight) is pretty minimal right now. We’re seeing that in the earnings for the tech giants, and I can say with near certainty that tech wages are headed down across the board unless you are an expert in generative AI. The hiring market in tech is much more competitive for job seekers right now than it has been in quite some time and there will be more layoffs on the way. Add in that big tech companies are still printing money and you get mega-caps exhibiting the best of both the long duration and growth worlds.
The other two dynamics that shouldn’t be ignored are the Fed put and passive investing in index funds. Why shouldn’t expected long-term returns go down if we know that the Fed will step in if things get too hairy or if everyone knows that passive investing is likely to generate the best returns in the long run (unless you are very wealthy)? Wouldn’t it make sense then for PE ratios to reset higher? Volatility is obviously the wild card, but like with the pandemic, I’d expect any large drawdowns to quickly bounce back up for the aforementioned reasons. I’d expect inflation to continue eating away at Main Street, but unless we finally get to the point where something is done politically, I doubt we’ll see any major drawdown or reset at least not for more than a brief period.
Science? Long-Term Capital Management
Thank you for writing this article. As someone who went short today this can be a painful lesson. But I agree about the 4200 level for the SP500 . If it goes beyond that I will have to throw in the towel.
In line with the ever-present “I went for brunch at a place in Belleport and it was jam packed…”
If you happen to use Craigslist, Facebook Marketplace and such, search for “used prom dresses” . Yep, Americans are awash in cash!
So far this S&P 500 earning season, the beat rate has been pretty good, but revenue growth is anemic (+3%) and on a downhill path, earnings growth is negative (-3%) and also on a downhill path, and I’d guess that margins continue to contract.
Also so far this S&P 500 earnings season, the best combination of reports, guides, stock reaction, market cap, and hit rate has been in the mega-techs. Not tech generally – specifically the megas.
So the scenario is a recession in which the best “hiding place” might be the index and consensus owns: GOOG, MSFT, META, AMZN, AAPL, etc.
This isn’t done yet. And I (we) have skin in the game. I don’t believe it will be a soft landing. No, I’m not an economist (and it’s hard to believe sometimes that economists are economists). But I keep looking at what’s coming down the pike and expecting a trigger for something significant.
It’s right to shine light on the words of Hartnett, Wilson, Kolanovic, McElligott, etal, whether the sun is shining or we’re in a blizzard. In a response to Misplaced Optimism, False Fed Optic, Liquidity Blamed for Sturdy Stocks, I noted some economic variables I was seeing, and it’s not getting any better.
Kevin McCarthy’s lack of confidence and false brashness doesn’t inspire confidence, and I really do not like the fact that he runs the House of Representatives at a time when the budget is due and the possibility of default looms. Covid pushed the budget over the edge. We have gone too far into debt: $31 trillion+. We take it for granted that all’s well. But it’s clearly a misperception. After all, how many among us are economists? How many economists are actual economists? Investors truly do need to watch out for themselves.
That said, the timing of the budget with the possibility of real estate loan defaults looming like it’s 2008, and McCarthy’s knack for screwing up do not inspire confidence. No it won’t be 2008 again. But it could be 2008-like. There are large cities across the country, like New York, Chicago, Los Angeles, Houston, Seattle, Jersey City, Minneapolis, etal, with large buildings standing empty. Someone has to pay the rent for those properties. Banks are holding all that paper.
Thanks to Covid, and the hangover it gave to our society, there’s a ugly question here: What could possibly happen? Is this situation secure and nice? Even comfortable? I don’t know. But I thing there’s a reason to doubt and to question.