Bullish News From Wall Street's Bearish Seers
Wall Street equity analysts sure are a gloomy lot these days. Based on the average estimate of forecasters surveyed by Bloomberg, they expect the Standard & Poor’s 500 Index to finish the year 1 percent lower than yesterday’s close.
This is noteworthy because it’s so out of character. Most of the time -- 82 percent during the past decade, to be precise -- analysts are bullish. To be fair, this outlook has usually been rewarded; market rise about three-quarters of the time.
The unusually bearish demeanor from the normally cheerful analysts on the street of dreams might be the single-most useful piece of news about equity markets I have seen this month.
Why are the forecasters so negative? They gave a slew of reasons:
• Rising interest rates
• Little movement in share prices
• Elevated stock valuations
• Declining corporate profits
• Aging business cycle
• Presidential elections
In the old days, these were known as the “wall of worry” for stocks to climb. That’s why I find this negativity to be bullish for U.S. equity markets. As the calendar third quarter comes to an end today, let’s unpack some of the thinking behind this view, and why it might be worth taking the other side of the trade.
I could address each of these, one by one: Rising interest rates? Ooh, they might jump to all of 0.5 percent this year, and they could even hit 1 percent next year! (Just for some perspective: In the 20 years before the financial crisis, short-term rates averaged 4.85 percent.) And we have been hearing about lackluster earnings for four years now. Stock valuations? When they are actually cheap, investors tend to shun them, and they have been expensive by most measures for most of the past 30 years.
But rather than respond to each worry, I’d prefer to approach this from a meta-perspective. There are a few things that might undercut analysts’ collective fears. Let’s jump right in:
Forecasts: Saying that markets will be little changed or decline in the next quarter is a prediction. Regular readers are probably familiar with my views on this subject (see this, this, this, this, this, this and this); suffice it to say that there is nothing about these forecasts to make us confident they will be right. Maybe they will be, maybe they won’t. But based on the history of forecasting failures, it is a long shot that the group’s prediction will be correct.
Wall of worry: When you stop to consider any given quarter, there is always a long list of worries. Not too long ago, it was the mosquito-borne Zika virus, Middle East turmoil and rising oil prices; earlier this year it was an impending Chinese economic meltdown; then there was Russia invading Ukraine and taking Crimea. There is always something.
Researcher Laszlo Birinyi and his staff put together a report in which they compile news articles filled with ominous warnings of all the terrible things that are about to happen. It makes for hilarious reading. Most of the things we fear in the moment are passing ephemera, of no significance to markets. Yes, those headlines often produce elevated negativity, which actually tends to help markets. Indeed, sentiment is an emotional state and it reflects concerns that tend to be irrational.
Priced in: Perhaps most significant of all, the headline news that we are all familiar with isn’t unknown to the markets. Markets may not be perfectly efficient -- I like to describe them as kinda eventually sorta mostly almost efficient -- but they usually get the big stuff right. All of those issues mentioned by strategists are well-known and reflected in today’s prices. Same with a big article in the New York Times, Wall Street Journal, Economist, Washington Post or here on Bloomberg; it has more or less already been discounted by markets.
The assumption that your Google news feed is giving you an edge as an investor is hopelessly naïve.
One last thing to keep in mind: Since 1970, the fourth quarter usually has been the best for equity markets. Bloomberg News noted that since 2009, the fourth quarter has seen gains in the S&P 500 that average 6.7 percent. That’s more than “twice the average gains of the next-best quarter.”
So I think I know where I’d put my money next quarter.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Barry Ritholtz at firstname.lastname@example.org
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