The 'most popular prediction' about stocks going into 2023 has been very wrong 😬
Discover more from TKer by Sam Ro
The 'most popular prediction' about stocks going into 2023 has been very wrong 😬
Plus a charted review of the macro crosscurrents 🔀
Stocks closed higher last week with the S&P 500 climbing 0.4%. The index is now up 12% year to date, up 20.2% from its October 12 closing low of 3,577.03, and down 10.4% from its January 3, 2022 record closing high of 4,796.56.
On Thursday, we finally got confirmation that the bear market ended in October and that we’ve been in a new bull market ever since.
We’re also realizing this year’s market moves so far have been far outside consensus expectations in a bullish way.
Let’s turn back the clock.
An ‘overstated’ concern 🤏
In December, I published a roundup of Wall Street strategists’ 2023 outlook for stocks. The takeaway at the time: “Strategists expect a volatile first half to be followed by an easier second half, which could see stocks climb modestly higher.“
The big concern was that a brief earnings growth recession, which has sorta come to fruition, would come with renewed selling in stocks.
But at the time, a handful of analysts, like Oppenheimer’s Ari Wald, ran the numbers and concluded “concerns are overstated.”
Not only is there a very weak linear relationship between one year’s earnings change and one year’s S&P 500 price change, but there’s actually some evidence that a trough in earnings is actually a lagging market indicator. Furthermore, history shows there are more instances when stocks didn’t fall but rose in years when earnings fell.
For more on this, read: One of the most frequently cited risks to stocks in 2023 is 'overstated' 😑
A ‘most popular’ concern 👯♀️
There was also the issue that many experts were openly calling for stock market weakness in the first half of the year. The prediction even made the cover of Barron’s!
At the time, two of the savviest Wall Street strategists I follow remarked on this. From the December 18, 2022 TKer:
“I do think that we are going to go down and then up… The problem is that is an increasingly consensus view. So I think the bigger risk heading into the first half is actually not being invested in equities.“ - BofA’s Savita Subramanian, Dec. 7
“Everybody and their mother, brother, sister, cousin, and uncle is negative on the first half of the year… So we'll come out and be a little bit different. I think the weakness is probably not going to be as long as everybody thinks.“ - BMO Capital Markets’ Brian Belski, Dec. 16
The thing about risks is that they become less of a problem for markets the more market participants talk about them because that means the risks are probably priced in.
Indeed, it’s mid-June and the stock market has spent the first five and a half months of the year mostly trending higher. The S&P 500 went modestly into the red on January 3 and 5; every other day it’s been in the green.
“The most popular prediction headed into 2023 was that markets would suffer through a rough first half but rally by year’s end,” Michael Arone, State Street Global Advisors, wrote on Tuesday. “However, stocks and bonds have refused to comply with the consensus forecast.”
In recent weeks, the consensus has shifted with strategists across Wall Street revising up their year-end price targets for the S&P 500, including Goldman Sachs’ David Kostin (to 4,500 from 4,000), BMO Capital Markets’ Brian Belski (to 4,550 from 4,300), BofA’s Savita Subramanian (to 4,300 from 4,000), and RBC Capital Markets’ Lori Calvasina (to 4,250 from 4,100).
The big picture 🤔
To be clear, this is not intended to be a celebration of bearish market-timers being wrong.
Rather, the point is that it is incredibly difficult to predict short-term moves with any accuracy, even when you know where the fundamentals are headed.
And it can be particularly dangerous to make bearish moves in a stock market that usually goes up. You risk missing out on significant short-term gains, doing irreversible damage to your potential long-term returns.
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Related from TKer:
How to become one of Wall Street’s most accurate analysts in one step 🧮
One of the most frequently cited risks to stocks in 2023 is 'overstated' 😑
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🛍️ Consumer spending is holding up. From Bank of America: “Bank of America internal data suggests consumer spending was broadly stable in May, with Bank of America total card spending per household up 0.1% month-over-month (MoM), seasonally adjusted. The year-over-year (YoY) growth rate remains negative at -0.2% YoY.“
From JPMorgan: “As of 04 Jun 2023, our Chase Consumer Card spending data (unadjusted) was 2.2% above the same day last year. Based on the Chase Consumer Card data through 04 Jun 2023, our estimate of the US Census May control measure of retail sales m/m is 0.46%.“
For more on resilient spending, read: Don't underestimate the American consumer 🛍️
💵 Household net worth rises. Here’s Bloomberg reporting on new Federal Reserve data: “Household net worth rose $3 trillion, or 2.1%, in the January-March period to $148.8 trillion after climbing $1.6 trillion in the prior quarter, a Federal Reserve report showed Thursday. The value of equity holdings increased about $2.4 trillion in the first quarter, while the value of real estate held by households fell roughly $617 billion.”
For more on consumer finances, read: Consumer finances are in remarkably good shape 💰
💵 Consumers have excess savings. Apollo Global’s Torsten Slok estimates households are still sitting on $1.2 trillion in excess savings.
This is a bit higher than the $500 billion recently estimated by the San Francisco Fed. Regardless, the bottom line is that consumers have a lot of excess savings, which explains why spending continues to be resilient.
For more on excess savings, read: Don't underestimate the American consumer 🛍️
💳 Delinquency rates improve. Here’s Apollo Global’s Slok on monthly Transunion data: “The latest data shows a modest improvement in credit card delinquency rates and auto loan delinquency rates for subprime, near prime, and prime borrowers, see chart below. This is the opposite of what would be expected with the Fed trying to tighten financial conditions.“
For more on delinquencies, read: Debt delinquency rates are normalizing 💳 and What rising auto loan delinquencies tell us about the economy 🚗
💸 Wage growth is cooling. From Indeed Hiring Lab: “Wages and salaries advertised in Indeed job postings grew 5.3% year-over-year in May, according to the Indeed Wage Tracker. This is down considerably from the high of 9.3% set in January 2022, but still well above the 2019, pre-pandemic average pace of 3.1%.“
For more, read: The good kind of deteriorating labor market 👍
💼 Unemployment claims tick up. Initial claims for unemployment benefits climbed to 261,000 during the week ending June 3, up from 233,000 the week prior. While this is up from the September low of 182,000, it continues to trend at levels associated with economic growth.
From JPMorgan economists: “The move could well be distorted by the Memorial Day holiday, which is hard to seasonally adjust. Moreover, it is just one week’s move. Still, should this level persist, it would point to a more material softening in the labor market.“
For more on the labor market, read: The labor market is simultaneously hot 🔥, cooling 🧊, and kinda problematic 😵💫
🛢️Gas prices cool as summer driving season kicks off. From AAA: “For the first time since 2021, domestic gasoline demand was over 9 million barrels daily for a third straight week. Yet despite the robust numbers, pump prices barely budged as the low cost of oil is countering a spike for now. The national average for a gallon of gas dipped a penny since last week to $3.56… Today’s national average of $3.56 is three cents more than a month ago but $1.39 less than a year ago.”
⛽️ Consumers are hitting the road. Weekly EIA data through June 2 show gasoline demand is up from a year ago.
⛓️ Supply chain pressures ease further. The New York Fed’s Global Supply Chain Pressure Index
— a composite of various supply chain indicators — fell in May and is well below levels seen even before the pandemic. It's way down from its December 2021 supply chain crisis high. From the NY Fed: “There were significant downward contributions from Great Britain backlogs and Taiwan delivery times. Euro Area delivery times and backlogs exhibited the largest sources of upward pressure in May. Looking at the underlying data, readings for all regions tracked by the GSCPI are below their historical averages.“
For more on the supply chain, read: We can stop calling it a supply chain crisis ⛓
👍 Services surveys were mixed, but reflected growth. S&P Global’s U.S. Services PMI climbed to 54.9 in May, signaling an acceleration in growth. From the report: “Businesses in sectors such as travel, tourism, recreation and leisure are enjoying a mini post-pandemic boom as spending is switched from goods to services. The survey data are indicative of GDP growing at an annualized rate of just over 2%, and an upturn in business expectations points to growth remaining robust as we head further into the summer.“
The May ISM Services PMI fell to 50.3, signaling decelerating growth in the sector as new order growth cooled. Though inventories returned to growth. Also, price growth decelerated.
For more on the conflict between hard data and soft survey data, read: What businesses do > what businesses say 🙊
🎈 Profit margins drive inflation. A New York Fed paper (HT Tracy Alloway) found “maintaining steady profit margins” to be the second most important factor influencing pricing decision for firms.
For more on the relationship between profit margins and inflation, read: What Fed Chair Powell said about the relationship between profit margins and inflation 💸 and Profit margins are becoming a key controversial issue in the inflation discourse 🤬
🏢 Offices are very empty. From Kastle Systems: “Office occupancy fell 1.4 points to 47.6% this past holiday week, according to Kastle’s 10-city Back to Work Barometer. The drop in occupancy was widespread, with all tracked cities seeing declines except for Los Angeles. The city rose two tenths of a point to 49% occupancy.“
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
📈 Near-term GDP growth estimates remain rosy. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.2% rate in Q2. While the model’s estimate is off its high, it’s nevertheless up considerably from its initial estimate of 1.7% growth as of April 28.
For more on broad measures of the U.S. economy, read: Still waiting for that recession people have been worried about 🕰️
Putting it all together 🤔
Despite recent banking tumult, we continue to get evidence that we could see a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
The Federal Reserve recently adopted a less hawkish tone, acknowledging on February 1 that “for the first time that the disinflationary process has started.“ And on May 3, the Fed signaled that the end of interest rate hikes may be here.
In any case, inflation still has to come down more before the Fed is comfortable with price levels. So we should expect the central bank to keep monetary policy tight, which means we should be prepared for tight financial conditions (e.g. higher interest rates, tighter lending standards, and lower stock valuations) to linger.
All of this means the market beatings may continue for the time being, and the risk the economy sinks into a recession will be relatively elevated.
At the same time, it’s important to remember that while recession risks are elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs. Those with jobs are getting raises. And many still have excess savings to tap into. Indeed, strong spending data confirms this financial resilience. So it’s too early to sound the alarm from a consumption perspective.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have had a pretty rough couple of years, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
For more on why this is an unusually unfavorable environment for the stock market, read: The market beatings will continue until inflation improves 🥊 »
For a closer look at where we are and how we got here, read: The complicated mess of the markets and economy, explained 🧩 »
TKer’s best insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
When the Fed-sponsored market beatings could end 📈
At some point in the future, we’ll learn a new bull market in stocks has begun. Before we can get there, the Federal Reserve will likely have to take its foot off the neck of financial markets. If history is a guide, then the market should bottom weeks or months before we get that signal from the Fed.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
The sobering stats behind 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 318 large-cap equity funds were in the top half of performance in 2020. Of those funds, 39% came in the top half again in 2021, and just 5% were able to extend that streak through 2022. If you set the bar even higher and consider those in the top quartile of performance, just 7% of 156 large-cap funds remained in the top quartile in 2021. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2022.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
Here’s some info on how the index is constructed, according to the NY Fed: “We use the following subcomponents of the country-specific manufacturing PMIs: ‘delivery time,’ which captures the extent to which supply chain delays in the economy impact producers—a variable that may be viewed as identifying a purely supply-side constraint; ‘backlogs,’ which quantifies the volume of orders that firms have received but have yet to either start working on or complete; and, finally, ‘purchased stocks,’ which measures the extent of inventory accumulation by firms in the economy. Note that in case of the U.S., the PMI data start only in 2007, so for the U.S. we combine the PMI data with those from the manufacturing survey of the Institute for Supply Management (ISM).“