To help gauge the various factors impacting markets at any given time, we sometimes write two lists on a legal pad. One list focuses on the positives: "Reasons why stocks might go up," if you will.
The other list highlights specific risks. Think: War in the Middle East, political uncertainty or slowing GDP growth. We generally focus on the macro landscape, but when it comes to the dangers facing investors, "too much conviction" deserves a permanent place on the list.
It's a great irony that while equity benchmarks deliver relatively predictable results over long periods of time, they are exceptionally unpredictable in the short term. This does not, of course, stop investors or professionals from convincing themselves otherwise in pursuit of better returns.
Consider a few examples from this year:
When 2023 began, the financial forecasters polled for their expert opinions overwhelmingly predicted a challenging year for U.S. equities. Midway through November, the S&P 500 is up 17% year-to-date and on pace to double the market's historical average annual return.
What happened when Wall Street's big banks and brokerage houses finally abandoned their 2023 recession calls and published more market-friendly economic outlooks in July? The S&P was negative in three consecutive months and fell 10% from its summer high.
Then earlier this week, the latest CPI report showed slower than expected inflation, leading to a furious stock rally. The Russell 2000 gained nearly 5.5% on Nov. 14 as investors second-guessed whether a "higher for longer" interest rate outlook is as inevitable as the consensus suggested.
There are at least two takeaways here. First, be wary of crowded trades and consensus forecasts. In financial markets, the herd mentality is wrong more often than it is right. Second, even the most well-schooled and well-paid professionals cannot consistently predict short-term market trends.
