In the section of his annual letter to his stock-holders explaining why their stock plunged 32% last year, Warren Buffett said, “I did some dumb things in 2008 … sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.”
Buffett doesn’t often get caught up in the problems that foil ordinary investors.
What is known in studies of human psychology as the ‘status quo bias’ is sometimes one of those problems. We humans dislike change, especially dislike having our minds changed, and usually wage an internal fight against it. When new facts are revealed that challenge our existing convictions the natural response is to reject the information as probably untrue, to accept only information that supports our current view - as in the age-old joke, “Don’t bother me with facts, my mind is made up.”
The facts certainly seem to be challenging the recent prevailing wisdom that the economy is already bottoming and will be recovering in the second half of the year. But prevailing wisdom is only slowly responding to those changing facts.
Recently, the Labor Department reported 457,000 more jobs were lost in June, considerably higher than the 350,000 forecast, and a considerably faster pace of losses than May’s 322,000 jobs lost. Wall Street analysts were shocked, but only for a few hours, before responding with opinions that the report actually indicated we are near a bottom for job losses.
When June retail sales were reported, and the additional declines in same-store sales were substantial, indicating that consumers are still cutting back, Wall Street spokesmen gulped and paused for only a few minutes before telling us that June sales aren’t important anyway, that what will count will be back-to-school sales in a couple of months, and they will be encouraging. The stock market actually closed up some.
Then, the University of Michigan released its Consumer Confidence Index, and it fell from 70.8 in June to 64.6 this month, another indication that the retrenching of consumers will not be even ending anytime soon, let alone reversing. Investors and traders didn’t seem to be unduly concerned, even though the hope for a quick economic recovery is based on consumer spending coming to the rescue. The stock market closed mixed, the blue chips down fractionally, and the speculative issues of the Nasdaq up fractionally for the day.
Yet some of those who led the cheerleading a few months ago that resulted in the bullish expectations that the recession is already ending are allowing the latest facts to cause them to re-examine their previous thinking.
Warren Buffett is probably one of the most prominent, all over the tube lately with remarks like “the economy is falling off a cliff … the economy will be in shambles this year and probably well beyond.”
The President, Treasury Secretary, and Fed Chairman are all toning down their previous optimistic remarks, which had also helped move prevailing wisdom past justified relief that the economy will not plunge into the next Great Depression, all the way to the opposite extreme of believing that the Great Recession is already ending.
Yet, while the market has been slowly drifting lower over the last few weeks, it seems very reluctant to allow facts to change its mind and factor out of stock prices its conviction that good times are only a couple of quarters away.
In February I said the prevailing wisdom had become far too pessimistic, and in the process had driven the market down to the most extreme oversold condition we had ever seen. I predicted one of the biggest bear market rallies ever would begin from those conditions and moved my subscribers from 70% cash to 70% invested within one day of the March low.
However, I also predicted it would still only be a bear market rally; that the market would return to the downside during the summer months, and that the easiest way to make profits would again be from downside positioning.
While I will be willing to re-examine my thinking if the facts or conditions change, I have certainly seen nothing in the latest economic reports to disabuse me of that expectation. I don’t expect the next buying opportunity to arrive until the September/November time-frame. By then - and it is only three or four months from now - perhaps the market will be able to look six to nine months out and legitimately see the economy actually bottomed and recovering next summer.
Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily market blog at www.SyHardingblog.com.
