Doom And Gloom Brigade Silenced?
Remember the days of "Jerome's Pain" and the prophesied economic apocalypse by the media, as they were quoting what The Fed Chair Jerome Powell had said numerous times in his speech at Jackson Hole? It was a brief speech, on Friday 26th August 2022. Seems like ages ago, doesn't it? The market, ever the drama queen, has staged a comeback, leaving the doom-and-gloom brigade scrambling for the next crisis du jour. With The Fed now saying the “pain” is over, and the S&P 500 at 4,719.19 you would think that we would not have the “is it a Bull Market” or “is it a Bear Market” debate as still a thing. But before we get swept up in the next wave of panic, let's take a step back and ponder a troubling question: what on earth is going on with all these fancy models?
From the Fed's inflation blindspot to Wall Street's recession fever dream, the past few years have been a masterclass in model malfunction. These sophisticated, data rich models, with history for decades, built by some of the sharpest minds in the biz, have consistently missed the mark, leaving us investors scratching our heads.
Think back to 2021. The Fed was still humming its "transitory inflation" tune, totally underestimating the inflation monster roaring at its door. Their models, it seems, were stuck in a pre-pandemic world of cheap eats and chill vibes. Meanwhile, the private sector, with their recession-predicting pronouncements, now look like they were reading tea leaves instead of the data being presented to them.
I have learned to accept the folly of predictions and relying too heavily on models, but typically we would be talking about coming out a stone throw away from the predicted outcome/s, not a country mile. That neither side “looks like” they know what they are talking about, or how this all works, is not a good look.
It is impressive that the Fed, although late to the party, did manage to take away the punch bowl, and quietly escort all the disorderly from the happy juice, to leave the premises without a serious scuffle. The Fed will likely not get the credit for finally playing catch-up and with the market defying gravity, you'd think the experts would be eating humble pie! However, the silence around the model “meltdowns” is deafening. It's like everyone's suddenly allergic to introspection.
Here's the uncomfortable truth: these models, for all their bells and whistles, are not crystal balls. They're sophisticated tools, yes, but they're still operating in a complex, unpredictable world. The pandemic, the war in Ukraine, the supply chain snafus, the regional banks kerfuffle – these are just a few of the curveballs that threw even the best models for a loop, resulting in very smart people creating expectations for the rest of us that were nowhere near the truth we live with today.
So, what's an investor to do? Should we ditch the models altogether and embrace the chaos? Not quite. Models, when used responsibly, can still offer valuable insights. But we need to approach them with a healthy dose of scepticism and remember: they're not a certainty, they're frameworks. When a Wall Street Strategist, or Analyst, or Economist gives you their expectation, it is a thesis and they will typically give you information that supports that thesis.
Instead of obsessing over the next big prediction, focus on understanding the underlying data, the research that feeds these models. Let's cultivate a healthy scepticism towards pronouncements of imminent doom or guaranteed gains. And most importantly, let's remember that the market is a dance, not a drama. It's unpredictable, yes, but it's also full of opportunities for those who can navigate it with a clear head and a process that you follow consistently.
So, keep your eyes on the data, and your mind open and don't fall victim to the charlatans who believe in “don’t let the facts get in the way of a good story”!
Stay curious. See you in two weeks as that is my cycle of publishing in case you have not picked up on that pattern.