{"id":193301,"date":"2023-07-11T11:50:00","date_gmt":"2023-07-11T15:50:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=193301"},"modified":"2023-07-11T11:52:52","modified_gmt":"2023-07-11T15:52:52","slug":"how-did-so-many-get-it-so-wrong","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/how-did-so-many-get-it-so-wrong\/","title":{"rendered":"How Did So Many Get It So Wrong?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">I recently had the privilege of being interviewed for <a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2023-07-08\/wall-street-forecasters-blindsided-by-tech-stock-rally-divided-on-2023-outlook?sref=UQoV8r0O\">this Bloomberg article<\/a>, wondering why strategists have widely differing views about the rest of 2023 and noting that many failed to anticipate the tenacity of this year\u2019s rebound after a very difficult 2022.&nbsp; As with most articles of this type, because of space constraints and the need to get multiple viewpoints, the reporters used a fraction of our discussion.&nbsp; Here is a fuller version of my thoughts on the surprising year to date.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One of the most basic tenets of investing is &#8220;don&#8217;t fight the Fed.&#8221; Simply put, one should be constructive on stocks when the monetary tide is flowing in, and cautious when it&#8217;s flowing out. &nbsp;Being bullish on equities in the face of the sharpest rate hikes in a generation alongside persistent quantitative tightening flies in the face of that logic.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Yet, what most people failed to recognize was the resilience of the job market and American consumer.&nbsp; <a href=\"https:\/\/www.stlouisfed.org\/open-vault\/2020\/january\/what-is-phillips-curve-why-flattened\">The Phillips Curve<\/a> seems to be of little value, if any, in the current environment, since there has been essentially no relationship between employment and rates.&nbsp; People are keeping their jobs and finding it generally easy to get them when they want them.&nbsp; It makes them able to spend money and invest their excess funds in their favorite stocks.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Furthermore, last year&#8217;s declines did little to dissuade individual investors from chasing their favorite stocks, especially when we can add a sexy story like artificial intelligence (AI).&nbsp; That led to narrow leadership by the mega-cap tech stocks that dominate major market capitalization weighted indices, obscuring the generally lackluster performance by the average stock.&nbsp; While the S&amp;P 500 Index (SPX) was up nearly 15% year-to-date as of yesterday, the equal-weighted SPX (SPW) was up just over 6%.&nbsp; And <a href=\"https:\/\/www.nasdaq.com\/press-release\/the-nasdaq-100-index-special-rebalance-to-be-effective-july-24-2023-2023-07-07\">the soon-to-be-less-top-heavy<\/a> NASDAQ 100 (NDX) is up 37.5% in that time frame.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We noted early this year that we were in the midst of one of the most spectacular \u201c<a href=\"\/campus\/traders-insight\/january-effectiveness\/\">January effects<\/a>\u201d that we had seen in quite some time.&nbsp; The drastic sell-off that we saw into the end of 2022, propelled by tax-loss harvesting after a tough year, led to a quick and powerful reversal as the calendar turned.&nbsp; That said, we didn\u2019t appreciate how fully sentiment would turn once the rally took hold.&nbsp; Nothing reinforces the idea of higher prices more than higher prices.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Bear in mind that the bond market got it wrong too.&nbsp; The yield curve has been screaming recession for months, but none has been forthcoming.&nbsp; Inverted yield curves, when longer-term rates are less than shorter rates, have been generally foolproof recession indicators throughout history.&nbsp; The inversion between 2- and 10- year yields has recently shrunk to 90 basis points, about 15 bp below its steepest near-record levels, but that still indicates significant recession concerns among bond investors. &nbsp;Remember, many equity investors take their economic cues from bonds.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A major positive wildcard actually came from the banking crisis in March.&nbsp; It seems perverse to think that the sequential failures of Silvergate (SICP), Silicon Valley Bank (SIVBQ), Signature Bank (SBNY) and Credit Suisse were market positives, but indeed they proved to be.&nbsp; The Federal Reserve and Treasury did an admirable job in keeping the crisis from metastasizing, but in doing so, the Fed extended about $300 billion in loans to the banking system.&nbsp; Those loans are carried on the Fed\u2019s balance sheet as assets, expanding it quickly and undoing a significant piece of the recent quantitative tightening.&nbsp; Much of that added liquidity almost immediately found its way into stocks once the crisis was averted.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"801\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/07\/Picture1-5-1100x801.png\" alt=\"Federal Reserve Balance Sheet Total Assets (top); Securities Holding (bottom)\" class=\"wp-image-193303 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/07\/Picture1-5-1100x801.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/07\/Picture1-5-700x510.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/07\/Picture1-5-300x218.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/07\/Picture1-5-768x559.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/07\/Picture1-5-1536x1118.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/07\/Picture1-5-2048x1491.png 2048w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/801;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Interactive Brokers, <\/em><a href=\"https:\/\/www.federalreserve.gov\/releases\/h41\/\"><em>Federal Reserve H.4.1 Releases<\/em><\/a><em><\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It&#8217;s my contention that the equity market&#8217;s response to monetary policy changes <a href=\"\/campus\/traders-insight\/securities\/stocks\/the-asymmetries-of-fear-greed-and-monetary-policy\/\">is completely asymmetric<\/a>.&nbsp; While rate hikes and restrictive policies have long and variable lags, accommodative policies have lags that are measured in weeks, not months.&nbsp; The market\u2019s reaction to quantitative tightening is slow and barely perceptible.&nbsp; A jolt of liquidity is felt almost immediately and can bring positive momentum and FOMO along with it.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Looking ahead, 2Q earnings season begins this week.&nbsp; We enter it with elevated prices and expectations, some of which were the result of that temporary bout of monetary accommodation.&nbsp; We can see from the chart above that the accommodation is now behind us.&nbsp; That leaves us susceptible to disappointment.&nbsp; But we&#8217;ve avoided disappointment thus far.&nbsp; A key positive to the recent rally was the generally positive market reaction to 1Q earnings in April, which came out just as the monetary jolt was being incorporated into prices.&nbsp; Can that be repeated?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Also, the end of the student loan moratorium later this summer is a real risk factor.&nbsp; Much of the money that would have normally been used to pay back loans clearly flowed into stocks.&nbsp; Also, a recent report from the <a href=\"https:\/\/www.nber.org\/system\/files\/working_papers\/w31247\/w31247.pdf\">National Bureau of Economic Research<\/a> showed that those with student loans are even more indebted now despite the post-Covid forbearance.&nbsp; The need to resume debt repayment could lead to outflows from the market just as we hit a seasonally difficult time for equities.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Thus, even though many strategists\u2019 year-end targets are currently underwater, it&#8217;s premature to say that the bearish end of year calls are truly wrong.&nbsp; As far as the year goes, we\u2019ve just finished half-time.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Strategists have widely differing views about the rest of 2023, noting that many failed to anticipate the tenacity of this year\u2019s rebound after a very difficult 2022.  <\/p>\n","protected":false},"author":4,"featured_media":182829,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[14700,18,6,8,9,26,3],"tags":[77,3598],"contributors-categories":[13576],"class_list":["post-193301","post","type-post","status-publish","format-standard","has-post-thumbnail","category-ibkr-market-insights","category-macro","category-north-america","category-region","category-securities","category-text-articles","category-traders-insight","tag-fed","tag-market-outlook","contributors-categories-interactive-brokers"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.2) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>How Did So Many Get It So Wrong? | 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