November 2024

Now is not the time for groupthink.

White House advisers kept telling Manchin not to worry. One pointed to how 17 Nobel laureates said inflation would be transitory. Manchin shot back: “You’ve got 17 educated idiots telling you what you want to hear.”

WSJ 11/17/2024

The US election is behind us. Stocks initially rallied and then have been giving some of those advances back in what we see as a healthy digestion of gains. As we mentioned in last month’s Risk Dashboard, we focused more heavily on the earnings reports that came out in the lead up to the election than on the market swings along the way. The quantitative results from earnings season were strong and management commentary tended to hit optimistic notes.

Earnings Scorecard for the S&P 500 Index for Q3 as of 11/19/2024 via Bloomberg.

The pattern, however, of companies beating consensus estimates on Earnings Growth with a greater frequency than on Sales Growth continued as we have often seen for the past few years. These types of beats are more indicative of cost cutting and efficiency efforts than pure growth. More from less is great, but that can only a get a company so far. Eventually to get more earnings you need more sales. This concept of the “consensus” is what we will focus our November Risk Dashboard note on.

At the top, we put a quote from Monday’s Wall Street Journal attributed to outgoing Senator Joe Manchin (I - WV). The article discussed the impact of inflation on the election, but that quotation jumped off the page as a classic example of the dangers of groupthink. A concept coined by sociologist Irving Janis in 1971 (brief summary article by Janis), groupthink is the phenomenon in decision making where groups can sometimes lead to and self-reinforce the wrong decisions. Pride, hubris, and an unwillingness to consider disconfirming evidence are all symptoms of groupthink. Janis’ original example is an analysis of the botched Bay of Pigs invasion, but relying on the wisdom of 17 Nobel Laureates, in the face of quantitative data and the contrary experience of everyday people, is a classic example as well. Indeed, the “amateur” Senator was correct to be worried when the “experts” were brushing it off.

We think this is an important example to remind ourselves of as we are now confronted with an unnerved media and financial press amid many unknowns about the course of economic policy. Those unknows do not dissuade commentators from speaking in absolutes or groupthink consensuses to rapidly emerge. Recent moves are what HVP CIO Paul W. Davis, CMT likes to call “shoot, ready, aim” investing. As we learned in the prior Trump administration, it will be more beneficial for us to focus on actions and implemented policies than to get whipped around by rhetoric and style. Tools like this Risk Dashboard are ways to take the emotion out of decision making, to focus on the numbers, and what the charts are telling us to build our own mosaic of the current environment. As ever, it is of critical importance to enter the market with an open mind. In the words of Shunryu Suzuki - “In the mind of the expert, the options are few. In the mind of the beginner, the options are many.” Backed by experience, we’ll try our best not to be hindered by it - embracing the power of a beginner’s mind.

Bullish Themes

• GDP Now and other macro productivity indicators are strong

• Talk of deregulation and tax cuts are generally bullish for equities

• A more business friendly M&A environment will support public companies, as well increase capital markets activity among Private Equity and Venture Capital owned firms - VIDEO BONUS on the topic from Schwab Network:

Bearish Themes

• Investors and the incoming administration are focused on the national debt and deficit - spending cuts could be coming

• The impact of tariffs are challenging to model

• Global wars may pick up steam during the lame duck period adding to instability

Keep your eye on

• The Department of Government Efficiency - how and will it work?

• Are you starting to use AI in your work and daily life?

• Housing sentiment and mortgage rates

• Political Betting Markets

Whatever happened to?

• “MyPlate” - the successor to the food pyramid.

We also are working on a special December edition which will look to 2025 in creative ways.

If you haven’t already….