Persuasion Time

The market’s recent action is a bit puzzling, but I suspect that the reasons for its movements are not as simple as the media would have one believe.  Friday’s big decline was attributed to the weaker-than-expected jobs numbers and supposedly new bad news from Hungary (did you know that Hungary’s GDP is around $186 billion – just a little big bigger than General Electric’s market cap?!).  Recall that just 3 months ago, the prospects of any job growth seemed unlikely.  I recall Bill Miller (portfolio manager at Legg Mason) at a conference back then suggesting that we’d be seeing job growth of 200k+ per month by the second quarter.  Nearly everyone there thought he was being wildly optimistic.  Sure enough, he was right.  The fact that job growth in this recovery has not been smooth and linear does not necessarily mean that the recovery has failed.  The market seems to think that it has.

This strange connection between the jobs report and the stock market got me thinking about past forecasts that had massive credibility at the time, but proved to be horribly wrong.  Think back to the middle of 2008.  Oil prices were rising rapidly and all the “experts” were forecasting higher and higher prices for the commodity.  I recall one particular report from a credible analyst at a big Wall Street firm forecasting that oil would reach $250/barrel within 6 months.  It didn’t.  The big surge behind oil’s move that year turned out to be massive buying (with leverage) from hedge funds and other traders.  The fundamentals of supply and demand were obscured by this trading, but market observers felt compelled to go with the trend and forecast higher and higher prices.

Think back to early 2009.  As the impact of the global credit crunch reverberated through all the markets, we found ourselves wondering where stocks would bottom out.  I recall clearly credible market observers saying with a straight face that the Dow Jones Industrial Average would fall to 4,000. Many others chimed in similarly woeful predictions, as if everyone was playing some kind of bizarre party game of stock market limbo (how low can you go?).  Happily, the market did not fall to that level.  Rational thinking and investors reacting appropriately to the deep-discount valuations eventually prevailed, and the market stabilized.  As it rose, many of these naysayers held firm their pessimistic notions nearly all the way up to the top.  Something Emerson once said comes to mind, “A foolish consistency is the hobgoblin of little minds.”

Think back to early 2010.  Many credible economists were suggesting that the recovery would be anything but “V-shaped.”  Double dip, “W-shaped,”  “L-shaped” and my favorite “square-root-sign-shaped” were all part of the forecasts.  Some suggested that this would be a “jobless recovery;” that unemployment would remain high or even rise at least to the end of the year.  Lo and behold, we began seeing job growth in March that has continued through May (albeit at a slower pace).  All of this suggests to me that the most dramatic forecasts rarely come to pass.  Often even the consensus is off by a wide mark.  The interplay among the forces of the economy, the markets and investor sentiment are complicated, and are often oversimplified by those seeking quick and easy answers, or newsworthy sound bites.

I make no pretense about knowing what the future holds.  I generally make no predictions.  But the weight of history is surely on the side of recovery.  There is a great deal of good news out there, but as Edward Yardini of Yardini Research commented last week, most of it is old news.  The markets are responding to new news as of late, and most of it appears to be bad.  I suspect that corporate earnings reports, which we will begin to see in July, may provide the shot of new, good news the market needs to resume its upward motion.  Time will tell…

This entry was posted on Monday, June 7th, 2010 at 8:59 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.