• Even if the economy were truly in bad shape currently, this wouldn’t necessarily pummel market growth, especially after this year’s decline. The economy isn’t the same entity as the stock market, and vice versa. The two are like estranged cousins who may see each other sometimes at Thanksgiving but otherwise rarely speak because they have a fundamental difference: Economic data is necessarily backward-looking, and the market, always forward-looking. So conflating one with the other can easily misplace forecasts of economic downturn on market projections. Remember that one of the greatest U.S. bull markets of all time started galloping through the Great Recession, after a deep decline. Another bull market started in 1982, when inflation was elevated.
• Fretting over anticipated earnings declines is much overdone. Naturally, earnings of many companies were messed up by the pandemic and its aftermath. Average forward 2-month EPS for the S&P 500 stood at about $240 early this month. Yet, as of the week of Oct. 17, Q3 earnings reports had started coming in better than expected. And even if the average figure turns out to be as low as, say, $210, this would still be more or less in line with the index’s long-term upward earnings trajectory. And with a lower numerator, P/Es will of course be fine.
• Inflation may start to come down sooner than many dire projections indicate. The University of Michigan survey of five-year inflation expectations, one of the best predictors, shows that many investors believe inflation is already starting to roll over, en route to 2% to 3% within the next few years. This indicates a belief that the Fed may come close to its 2% target, after all. Considering the accuracy record of this survey, there’s a real possibility that their intuition may be better than that of many economists and Wall Street figures predicting all but certain failure by the Fed, sustained ultra-long-term inflation and a nasty recession next year to boot.
Thus enlightened, many clients may feel liberated from the emotional ropes holding them victim to the deadly blade swinging over their holdings. Then they might be inclined to discuss allocation changes for the coming, post-pendulum market.
Dave Sheaff Gilreath is a founding principal and CIO of Innovative Portfolios, an institutional money management firm, and of Sheaff Brock Investment Advisors, for individual investors. Based in Indianapolis, the firms manage assets totaling about $1.3 billion.