It is very rare to find Wall Street analysts as dour as they are today. As typical following a year of stock market struggles like 2022, 2023 has been a pretty positive year for many companies’ stock prices.
You would think the rest of the year would be filled with hope, optimism, and confidence based on our current trajectory.
Instead, a large majority of professional prognosticators are projecting that the stock market will slip slightly between now and the end of the year. They are putting the following logical pieces together to reach these pessimistic conclusions:
- The Federal Reserve will likely be raising its target overnight interest rate again today, and there is some chance they will raise interest rates one more time before they are done.
- Consumer cash flow is being negatively impacted by higher interest costs and many will be restarting student loan payments in the fall. Given the importance of consumer spending to our economy, there is the potential for an impactful economic decline.
- Regional banks could come under additional pressure from higher interest rates and falling commercial (primarily office) real estate values. This could reduce the amount of capital available for businesses to operate or expand.
- Future corporate earnings estimates may be too high and could come down as the economy slows.
- Two traditional recession indicators have been flashing caution for an extended period of time. The yield curve has been persistently inverted for over 13 months and the Conference Board’s Leading Economic Indicators have been in decline for 15 months.
Wall Street analysts are well known for their excessively cheery outlook. If Wall Street has run out of optimists, surely the stock market will be falling soon.
Or not.
Perhaps the following plausible pieces will create a more optimistic outcome:
- The job market remains very strong with unemployment near historical lows. Consumers are confident about their future income which supports increased spending.
- The major banks just passed their “stress tests” with flying colors. They are flush with deposits and are in a position to continue lending.
- Both companies and consumers used the last few years to lock their debt into long-term fixed rate bonds. While the Federal Reserve is raising short-term interest rates, it is having little impact on personal or corporate financials.
- Consumers and companies have been preparing for an “imminent” recession for almost 18 months. Instead of a quick massive economic adjustment which triggers a deeper recession, they may have implemented a slow-motion recalibration which could avoid a recession entirely.
The financial markets’ primary role is to be unpredictable in the short-term but profitable in the long-term. Cycles of greed and fear randomly roll through time creating both danger and opportunity for short-term adrenaline-driven traders.
Confident investors – while aware of curious daily market gyrations – have the luxury of time on their side. The hyperbolic headlines, occasional temporary volatility, and daily shenanigans roll off their psyche like water off a duck’s back. They invest on a whole different time level than the churning masses.
It is certainly true that the Wall Street pessimists could be right and we may have a market rough patch later this year. It is equally true that the market could be more optimistic than they envision.
As long-term investors, we are humble enough to acknowledge that we do not know the short-term future and, because we have structured our long-term financial plan appropriately, we care not about such trivial matters except for the long-term opportunities they potentially create.
Quote of the week: Charlie Munger: “The big money is not in the buying and the selling, but in the waiting.”
