Nobody Knows What’s Going On

If you follow financial media with the slightest interest, then you’ve likely heard of Jim Cramer. 

In case you don’t know him, Cramer is a staple on CNBC and known for making bold calls on individual stocks and the markets. 

Lately, however, Cramer has become internet famous for getting the markets wrong. 

And that’s because, unfortunately for Cramer, many of his “buy, buy, buys” from months ago have proven to be complete disappointments.  His most notable public flop was his seeming infatuation with the company Meta (Facebook), whose stock is now down well over half its value this year. 

Now, his bad calls have become so persistent that Cramer has become an example of how not to invest your money.  And this has led at least one fund manager to announce its plans to launch an inverse-Cramer exchange-traded fund (ETF) to raise money that would bet against the pundit’s market calls.

Make no mistake, while Cramer is most notable for his unfortunate calls, there are other market prognosticators out there, including individuals like Cathie Wood and Chamath Palihapitiya, who have had highly visible bad calls and their own falls from grace with their investors.

The point here is not to poke fun at another financial professional for their folly but rather to point out that sometimes, no matter how convicted one may be about a view, the economy or markets will behave in a way that we don’t expect.

Take the current mainstream market view, for example.

Coming into October, an imminent economic, earnings, and market crash was inevitable, according to some views.  Today, that doesn’t seem to be the case, as economic and market conditions are faring much better than some pundits had anticipated.

Now, it’s understandable why some individuals were calling for a complete financial collapse.  A month ago, interest rates were pushing to levels we hadn’t seen in over a decade, putting strain on some parts of the global markets.  This development led some individuals to believe that the same systemic risks present during the Global Financial Crisis well over a decade ago were now coming back. 

Adding to the worry coming into this month’s corporate earnings season were expectations among many market analysts that higher operating costs and economic woes likely would eat into the bottom lines of firms across many sectors across the economy, leading to a disappointing reporting period.

And if systemic issues and earnings disappointments weren’t enough to add to the individual investor’s reasons to worry, well, October was supposed to be a month where market participants would finally throw their hands up in their air, and usher in a market selloff to the degree of which we likely wouldn’t have seen since the height of the Great Recession.

But none of these things happened. 

Rather than catastrophe, incoming reports reflected a resilient economy, better-than-expected earnings, and strong moves higher in some parts of the markets.

The simple truth is that nobody knows what’s going on.

What Went Wrong?

So, what do we know after seemingly looking into the abyss a month ago?  Well, we know that the U.S. economy was in a much more solid position in the third quarter after two quarterly declines at the start of the year.  We know that firms can still pass costs along to consumers without complete demand destruction.  And we know that the market’s direction is not entirely dependent on one broad market narrative, like the “Fed Pivot” we’ve heard about recently.

For example, when the U.S. government released a first-look at U.S. growth last week, it showed that the economy advanced at a better-than-expected 2.6% quarterly annualized rate in the third quarter.  While signs of the housing slowdown were evident in the data, household spending was resilient despite consumer confidence being at its lowest levels in 40 years.

On the earnings front, the much-anticipated earnings recession failed to materialize.  Over two-thirds of S&P 500 companies that have reported so far have beat expectations.  And while some major tech companies reported disappointing earnings that led to double-digit declines in their stock prices last week, 81% of reported tech companies had beaten expectations, according to S&P data. 

And how about that bear market selloff that some investors were expecting?  Well, investor confidence, as measured by the American Association of Individual Investors, is at its lowest since late 2008.  But, following last week’s earnings release, the Dow Jones Industrial Average is on track for one of its most robust monthly gains in decades, with dozens of stocks in the S&P 500 index pushing to new highs following last week’s earnings announcement. 

No One Knows What’s Going On

Now, if you acted on the mainstream market view of doom and gloom coming into October, you likely would have faced some major financial disappointments this month.

The fact is that predicting the future is hard work. 

While many financial professionals borrow tools from the hard sciences to assign probabilistic outcomes to future events, making directional calls on the economy and markets is challenging in the current environment. 

Make no mistake, many well-intentioned professionals rely on complex data to make useful predictions on the future of the economy and markets.  Yet, in many ways, historical data is a less helpful analog for what’s going on in today’s environment. 

Using a reference from the data analytics approach, we have entered a period with a structural break in the data.  Or, to put it differently, the historical data used by some today to forecast the economy and markets is less valuable than it has been in the past.

For example, we’ve gone from a multidecade decline in rates and inflation to rising borrowing costs and higher-priced goods and services.  Structurally, the U.S.’s geopolitical influence globally is coming under considerable pressure, and its key source of influence (a dollar-based global financial system) is, in some ways fraying at the edges. 

Add in a digitized economy and how it has changed how households work and how they buy goods and spend their money, and it’s not too difficult to see that many of the past predictive regimes are now in flux and less informative to diving the future. 

That’s why trying to apply hard-and-fast historic rules of thumb to current market conditions can be a setup for financial disappointment or, in the case of market prognosticators like Jim Cramer, a source of awkwardness. 

Where to from Here?

Few individuals know where the economy and markets are headed next week, next month, or next year. 

And, the lessons learned from individuals like Cramer or others out there is that holding firm to a past conviction in a rapidly evolving market and economic environment can lead to financial mistakes. 

So, if you’re the individual who gets caught up in the moment-to-moment moves in the news cycle to manage your finances from one moment to the next, then you’re likely setting yourself up for failure.

What you may want to consider is having strong opinions loosely held.  Or as economist John Maynard Keynes put it, “when the facts change, I change my mind…”

Either way, what’s essential to gaining peace of mind in times like these has less to do with figuring out the markets and more to do with having a solid long-term financial plan from which to manage your money so that you can look past the near-term headline noise.

Make no mistake, there’s still strong evidence to suggest that we’re likely to see slower economic growth, earnings disappointments, and more market volatility in the coming months.

The fact is that we don’t know, nor can we control, how and when these events might take place.  That’s why rather than basing your financial decisions on what you think might happen next month or next year, stay focused on your long-term financial plan. 

Indeed, focusing on things you can control in your financial plan, like spending and savings decisions, and staying committed to your disciplined investment process might help you secure your path to financial independence in an environment where nobody knows what’s going on.