The only constant in life is change — and Wall Street strategists trying in vain to divine the stock market’s future. After collectively missing the lion’s share of the year-to-date rally in the S&P 500 Index, the Street’s macro soothsayers appear to be getting modestly more bullish again.
Here’s the latest from Bloomberg News on what my Opinion colleagues John Authers and Isabelle Lee have aptly dubbed the “Great Strategist Short Squeeze”:
"There’s a shift in tone happening across Wall Street. Oppenheimer Asset Management’s Chief Investment Strategist John Stoltzfus lifted his target on the S&P 500 Index to a Street high, a day after Morgan Stanley’s Michael Wilson, one of the market’s leading doomsayers, sounded less bearish than usual."
Stoltzfus, who — to his credit — has been more bullish than most this year, now projects that the S&P 500 will reach 4,900 by the time we ring in 2024, a 6.7% increase from Wednesday’s close and the new most optimistic outlook among strategists surveyed by Bloomberg. Citigroup Inc.’s Scott Chronert also raised his 2023 year-end call for the gauge to 4,600 from 4,000 previously (and to 5,000 by mid-2024 from 4,400). While the average forecast from strategists surveyed by Bloomberg still has the S&P 500 declining through the end of the year, the momentum is clearly shifting.
One possible implication of the “short squeeze,” of course, is that the improving outlooks could become self-fulfilling prophecies. In a traditional short squeeze, investors that had been betting on market declines are forced to buy shares to close out their short positions, inducing a temporary spike in the underlying asset. Something vaguely similar could take place in the S&P 500 over the near term as bearish thought leaders throw in the towel and their followers buy back into the market.
In the big picture, however, the moves are another reminder of how wrong Wall Street has been in the first place — and why strategist outlooks should never, ever, be taken as gospel.
Consider what would happen if you had bought the index every time the 20-day moving average dipped below strategists’ average year-end target and sold whenever the average crossed above it.1 Your total return in the frenzied post-2019 period would be about 8.3% (2.2% annualized), compared with the 48% (11.5% annualized) return that patient index investors earned with a simple buy-and-hold strategy.
Following this approach would have meant staying long into the initial pandemic crash; cashing in your chips relatively early in pandemic recovery; overtrading in 2021 for minuscule profit; staying long through the entire 2022 selloff; and missing a lot of the 2023 recovery. The “strategy” (if you can call it that) generated seven buy and sell signals each, and it would have left you sitting on the sidelines since April, comforted only by the modest inflation-adjusted return outlook for your money market account.
Of course, some of the strategists are bound to be right some of the time, as I wrote last week about Michael Wilson, the Morgan Stanley star who was lionized after his bearish calls in 2022 and then picked on by many of the same people for staying bearish too long in 2023. It may well be that we’re living through a Stoltzfus kind of year and that the Oppenheimer strategist is bound for Wilson-level fame in the financial media. For investors, the problem is that you never know who will have the hot hand, and the average price target exhibits no usefulness in helping to beat the market.
I don’t mean to beat up on the strategists. As I wrote last week, they have one of the hardest jobs on Wall Street. Under the watchful eye of the investing public and financial media, they’re asked to get a grip on market fundamentals (challenging) and investor sentiment (even harder) and come up with index-point-level projections for a specific date at the end of each December (impossible.) There are no strategists — at least among those on my radar — who consistently get it right. They do, however, generate valuable and thought-provoking research on the various risks and opportunities in each market, and their target prices serve as useful frames of reference — as long as you see them as the highly imprecise thought experiments that they are.
Here’s how DataTrek Research co-founder Nicholas Colas (a former sell-side stock analyst covering autos) described the challenges of projecting stock prices in a very sage and candid research note last week:
"Estimating earnings to within +5/-5 percent is typically not all that difficult, but valuing those results is very hard indeed. Markets are rarely static, rewarding or punishing sectors and stocks based on macro issues as much or more than company-specific fundamentals depending on where we are in a given cycle. Institutional investors know all this, which is why most will tell you that analysts’ price targets are the least useful number Wall Street publishes."
He was talking about company-specific price targets, but the wisdom behind the comment carries over — in my humble opinion — to macro forecasting as well.
In the current context, strategists have done a fine job projecting the fundamentals. At the current pace, S&P 500 earnings per share will probably end the year just about 2% to 3% above the strategists’ average January projections. Where they have failed is in predicting the unpredictable: sentiment and its impact on stock market multiples. Who would have guessed that forward price-earnings multiples would shoot up from about 16.9 times in January to 19.6 times now? And who would have thought it was possible with yields on 10-year Treasury notes above 4%?
No doubt, the current situation creates a bind for investors who sold their stocks earlier in the year because they thought the upside was tapped out and the risk-reward was better in Treasury bills (paying close to 5% annually at the time, and even more today). Naturally, they’ll want to know if they should chase the rally in the hopes that the strategist short squeeze has further to run or wait for a better entry point. Needless to say, that’s not for me to say. In the grand scheme of things, recent history suggests they should have never gotten out in the first place because boring old buy-and-hold index investing still beats the collective wisdom of index-level price targets by a wide margin.
1I will acknowledge this may be a bit of a strawman argument, in the sense that most strategists wouldn't actually tell you to actively trade on their target prices like this. It's just meant to illustrate the point about their usefulness in isolation.
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