The more I observe the market, the more I realize that mood has more to do with asset prices than anything else.
To see what I mean, let’s rewind back to the second half of 2021…
Inflation was already high, and it already started to seep into earnings.
Most companies were openly lamenting about it in almost every earnings report. Rate hikes were getting priced in as early as October.
Granted, not as much as they are now but the writing was on the wall.
At some point, it became common knowledge that rates would head upward.
All of us (except the Fed) knew this. Valuations were at “dot-com” bubble levels.
Yet, no one cared…
The Cause and Effect of Market Perception
Today, we’re still talking about the same things we were talking about back then – inflation and rate hikes.
In fact, we’re talking about it so much, I’m looking for reasons why it can potentially go the opposite way back into a deflationary period.
So, I’m actively looking for reasons to adjust my call from early 2021, when I said inflation is the biggest trade to bet on.
History shows when everyone enters groupthink, it’s time to think differently.
Yet, I wonder what triggered everyone’s flip this year… resulting in the worst half since 1970.
If the market is truly forward-looking, then some of this year’s losses should’ve been distributed more evenly in 2021.
So, what really changed?
I would argue… not much at all. Except people’s collective perception about risk.
Because identifying changes in market perception is more important than assessing value in the short term.
It’s why the market couldn’t drop last year, and it’s why the market can’t rise now.
Every relief rally has failed so far… although I do have some hope for this current one, as I explained in my last essay.
But the point is… the market is manic.
And we must constantly account for that reality.
Fundamentally-oriented investors will have my head for saying this, of course. But the short term is more important.
It’s the difference between being profitable or not. Get in at the wrong time, and your fundamental outlook is worth as much as the paper (or spreadsheet) it’s written on.
Over the years, I learned this is why investors that have seen it all roll their eyes when young analysts present mountains of fundamental evidence for one opportunity or another…
Market timing is everything.
It’s why making money in the market is hard. Fundamentals just don’t capture mood swings quickly enough.
It’s why more and more Nobel prizes are handed out for efforts in a field known as Behavioral Economics.
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The Truth Comes Out About Why Everyone Remains Bearish
So, in my quest to understand these dynamics, I’m reading more insights from the heads of institutions. And I’m talking to more asset allocators to really understand their mood.
When I press them hard enough, the truth starts to come out…
It’s just all in their head.
When they bring up bad fundamentals (which the market already priced in), it’s just an excuse for what’s subconsciously driving them.
The same ones that were heavily bullish just six months ago, are now careful with a market 20% lower.
It’s on sale. You should be buying, right?
So, my first question is always, “Are stocks still expensive?”
They usually answer a begrudging no.
They’re forced to say no because of the data… It’s a market that’s come down in price and in which price/earnings (P/E) multiples are now slightly above the lows of the March 2020 pandemic.
They can’t argue with that.
Now, regarding earnings, I do agree with them about the possibility that sell-side analysts have painted too optimistic a picture of earnings over the next 12 months.
Which is why the P/E multiple for the market, currently sitting at 16X, might be artificially low.
Seeking the “Lehman Moment”
That makes this upcoming earnings season crucial.
It begins July 14 with JPMorgan Chase. We’ll then see if these estimates are too good to be true given an economy with drastically declining growth.
But at the same time, ask them where the S&P 500 will end up at the end of 2022, and resoundingly all of them (even the most bearish analysts) think it’s higher than where it is now.
Take a look at the estimates from 23 leading Wall Street strategists…
The most bearish view is 3900.
So, why is every relief rally failing if everyone thinks the market will end up higher than where we are now?
Press them a little harder and they all answer the same thing.
In the back of their head, everyone is looking for the “Lehman Moment,” which triggered the 2008 global financial crisis.
They don’t know where it will come from… but for whatever reason, they just “feel” it.
They’re looking for the worst-case scenario to become realized because they’re scarred from the systemic downfall of the economy in 2008.
They’re looking for panic. They think the selloff this year has been too orderly. They want the screen to shake and the market to fall another 20% from current levels.
Which just proves the old and tired saying, that ultimately bulls live higher and bears live lower.
Regards,
Eric Shamilov
Analyst, Market Minute
Reader Mailbag
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