Improved forecast feels good, means little
As stocks continue their summertime cruise with recession fears fading in the rearview mirror, it has become Wall Street chic to improve economic forecasts and year-end stock market targets.
Merrill Lynch this month adjusted its outlook “in favor of a soft landing, (meaning, no recession) where GDP growth falls below trend in 2024, but remains positive.”
J.P. Morgan likewise no longer projects a recession and anticipates modest, if sub-par growth in 2024. The report “doubts the economy will quickly lose enough momentum to slip into a mild contraction… as we had previously projected.”
There’s a long list of financial prognosticators who are suddenly bullish on the economy and the stock market after the S&P 500 rallied 20% from its October 2022 low.
To be fair, there have been a multitude of legitimate surprises thus far in 2023. Economic growth has not only remained positive, it accelerated in Q2 with U.S. GDP increasing to 2.4% annualized (from 2% annualized in Q1). Unemployment has ticked only slightly higher despite 18 months of hawkish monetary policy from the Federal Reserve. Corporate earnings have fallen less than anticipated.
On the other hand, most of these same companies were preaching caution if not outright concern to investors at the start of the year. The educated guesses of economists and analysts are by no means worthless, but should not be viewed as a map to navigate financial markets.
Optimism is again trending on Wall Street. There’s nothing wrong with that. Just be sure to acknowledge it’s as much a reaction to prior events as it is a predictor of future returns. Call us contrarian, but we tend to feel most confident in equities when there’s a healthy dose of cynicism on the Street. Such conditions result in lower expectations. Widespread enthusiasm leads to stock prices more difficult to justify.
Equity prices have jumped this year due to a major recalibration of inflation risk and recession risk. It’s more difficult to see a catalyst between now and year-end. We admit, however, that when stocks are trending higher sometimes an absence of bad news is all it takes to maintain momentum.
The real takeaway is that no short-term forecast should be relied upon for major investment decisions. Your retirement date, withdrawal needs, and risk tolerance are better tools to build a financial strategy than any quarterly investment outlook. It’s human nature to be intrigued by crystal balls, but a boring old compass will prove more useful.
Revisiting your long-term financial plan and comparing current allocation to long-term targets may seem less important when markets are up, but adhering to those basic principles and staying disciplined will maximize your odds of success over time.
Resist the urge to develop too much conviction based on what someone else’s year-end price targets might suggest. The vast majority will either be lucky or wrong. And figuring out which projection offers genuine value can be just as difficult as timing the market.
Consider the investors who based their portfolio positioning on consensus market forecasts nine months ago, then revised their strategy in recent weeks in conjunction with rosier outlooks. The result has been significant underperformance.
In the end, most forecasts are more entertaining than educational. Even if they make you feel good, they mean little.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Authors
Ben Marks & Brett Angel
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