Dear Mr. Market:
It is with a sense of awe and intrigue that we find ourselves reflecting upon the first half of 2023. In the world of finance and investment, prognostications and predictions often hold sway, shaping the decisions of market participants. However, it seems that the experts and pundits who were convinced of an impending recession this year may have misjudged the situation. Indeed, we are witnessing what could be deemed as the most telegraphed recession that never happened, at least not yet.
Throughout the past year, a chorus of voices emerged, proclaiming that the global economy was teetering on the edge of a precipice. They cited various factors, including rising inflation, geopolitical tensions, and lingering effects of the pandemic, as harbingers of an impending economic downturn. The warnings were dire, and many investors began bracing themselves for the storm.
Yet, as the months unfold, the predicted recession has remains elusive. Economic indicators have displayed some resilience and even showed signs of strength in certain sectors. Employment numbers continued to improve, consumer spending remained robust, and corporate earnings surprised to the upside. It became evident that the narrative of a looming recession is not unfolding as expected.
So why did so many experts and pundits get it wrong? One could argue that the very nature of predictions is inherently flawed. The global economy is a complex system influenced by countless variables, and attempting to distill its trajectory into a neat forecast is a formidable challenge. The interconnectedness of markets, the intricate dance of supply and demand, and the psychological aspects of investor sentiment all contribute to the unpredictability of the economic landscape.
Furthermore, hindsight bias may have played a role in coloring the predictions. It is human nature to remember the predictions that turned out to be correct while conveniently forgetting the ones that missed the mark. This selective memory can create a skewed perception of accuracy, leading experts to believe they have a better handle on the future than they actually do.
Another factor to consider is the influence of media and sensationalism. In today’s fast-paced, information-driven world, the news cycle thrives on attention-grabbing headlines and captivating narratives. The notion of an impending recession fits neatly into this mold, as it stirs emotions and draws readership. Consequently, the predictions of a recession gain traction and echo through the media landscape, despite their uncertain foundations.
Although so many pundits won’t admit it (yet), we’ve been pounding the table that the bear market from 2022 put its bottom in last October. That being said, hardly any investor (amateur or pro) wanted to say it out loud. We did….and we’re not usually ones to pretend we can predict markets or own any magic crystal ball.
Understanding things could change, we’re feeling confident that we made the right decision to let clients know that, while we’re not out of the woods yet, there would be a recovery and this year is showing us exactly that so far. Below is a screenshot of one site we look at often and it allows an interactive look at each asset class year by year. What you’ll see here (aside from a nice start to the year) is that (1) there is never a discernible pattern and (2) being well allocated (AA) matters beyond having the prescience to pick the winning asset class each year.
This “letter” to our friend Mr. Market is not a self pat on the back job or some aggrandizing message to our loyal clients and readers; what it is rather, is a reminder that if you fell prey to “stinking thinking” at the outset of this year, you need to reevaluate your source of information or find ways to ignore the noise at times. Even if the “noise” sounds quite convincing, depressing, or outright scary, try listening more to steadier hands and ones who perhaps didn’t overreact or cave into emotions. If your advisor mentioned that 2023 might actually be a positive year, how about listening to their guidance more the next time things seem chaotic?
My Portfolio Guide, LLC has been talking about stocks not being dirt cheap but still attractive and oversold relative to all that we’ve just been through the past couple years. Sure, the ride is usually never smooth but not only have we mentioned multiple times that things got overdone in 2022 with some truly unusual anomalies, but there was a lot of historical precedence that the markets would recover (3rd year of a presidential election etc). For those with short memories, we wrote as clearly as we could following one of the worst years in history (when looking at both stock and bond returns) that the markets would come back. The year is still young but here’s what we missed and here’s what we nailed:
Oil– It’s really struggled. Artificial Intelligence (AI) – it’s rocketed to the moon. (click here if you want to review our 2023 outlook so this doesn’t come across as some rear view mirror type stuff) Yes…you’ll hopefully get it after reading all of this article or our past newsletters…but we’ve simply been more bullish than just about anyone out there. That said, we know it’s not all pretty under the hood. Matter of fact, speaking of all the rage that AI has been…check this chart out below. If you strip out AI stocks the S&P 500 is not doing that great.
Starting off a year strongly also of course doesn’t necessarily guarantee the same finish but it certainly bodes well. Those that caved into emotion and sold out simply hurt themselves. We’re not playing the “I told you so game” but ask you to try and learn from this. Also be cognizant that more gains could be had even in light of some worrisome headlines. When the S&P 500 is up between 10% and 15% YTD as of the end of June, the rest of the year has been higher 12 out of 12 times and up a median of nearly 11%. The next six months average about 5% more to the upside.
We would also like to share some more data on how July can work out for investors in light of recent history. It’s generally the strongest month to begin with but over the past decade we would not want to bet against it going higher. Imagine how adamant all those doom and groomers must now be about eventually being wrong….Those poor souls are now married to their false convictions yet most are never made accountable in the news but rather ironically still somehow earn the right to have a platform (and further frightening investors).
The low inflation and easy money days are revealing some truths to the market so expect volatility as things continue to be digested. Like all statistics and swings, there is also a reversion to the mean. Back to inflation and easy money showing us things we may not want to see…we’re reminded by another Warren Buffett quote, “Only when the tide goes out do you discover who is swimming naked.”
Lastly, to wrap this all up with another prognosticator that has made some news lately, British billionaire Jeremy Grantham (who manages about $65 billion), thinks the odds of a crash are now at 70%. This dire prediction has come down from his prior prediction that we would have an 85% likelihood of a stock market crash similar to 2000 or even 1929. Without mocking any bright or successful minds…let’s just see how his predictions end up. His target on the S&P 500 is 3,200 which from these levels would be about a -27% drop.
Please make a note to come back to articles like this and see who was right? We think you’ll see a lot of experts simply end up coming across like fear mongers and broken clocks. Jeremy and many others are running out of calendar on a year that is supposed to be an outright disaster with bubbles bursting left and right. Enjoy the second half folks…barring any true Black Swan calamity, we’ll finish higher just as we’ve said from the start.
