Consensus Is Rare

October 15, 2019 - John Osbon (4 mins to read)

It’s difficult to get a broad idea across in one headline. When it is done in the investment media, the bias almost always skews negative, mostly for dramatic effect. If all indicators were bad, everyone would want to sell and there would be no buyers. With positive consensus, on the other hand, there would be no sellers. A broad and balanced take on the market, with both positives and negatives, really can’t be reduced to a headline. With this reality, we write this weekly article to serve as a buffer between what the media says and what is actually important, because we are optimizing for education instead of ad revenue. What is the current market consensus and why? Let’s look at some of the meat on the current market bones.

Same data, different conclusions

Morgan Stanley’s Chief Investment Officer Lisa Shalett has been negative all year on US stocks and still is. She prefers commodities. Goldman Sachs, by contrast, prefers equities overall and believes it is too early to reduce risk. Unfortunately for those looking for an easy answer… both firms are correct. In other words, there is no consensus among these two Wall Street powerhouses and both perspectives have their merits. They are looking at the same data. They worry about earnings, rates and growth but come to vastly different conclusions. That is the normal state of affairs in markets: there is rarely consensus.

Why consensus is rare

The only time I can remember consensus is when the news suggested “sell everything.” Examples are the crash of ’87, 9/11, and September 2008. Conditions seemed so dire, few could see any light on the horizon. I can’t recall any positive consensus of equal intensity. Negative consensus, it turns out, is a great time to invest. With everyone wanting to sell, bargains abound for long-term investors.

We rarely see these moments of consensus because crashes and market disasters don’t happen very often. Most of the time there is widespread disagreement over market direction, with enough positive sign to produce upward trending stock prices. The same upward price trend has also occurred in the bond market. The Fed lacks consensus even with rate cuts. There are now three groups: no rate cut, ¼ point cut and ½ point cut. For the first time, we have three groups debating at the Fed instead of the usual two.

What we know for sure

Lacking consensus, what can we say about current conditions? We know that the US economy is growing, that unemployment remains at an all-time low, that inflation has disappeared, and that the Fed will cut rates in October or December. This scenario may prompt you to refinance any loans you have. The interest rate curve is no longer flat or inverted for the first time this year, which indicates a growing economy. The threat of higher oil prices dissipates soon after a missile attack or tanker seizure. There is plenty of oil in storage to make up for temporary interruptions. Outside of oil, the future of renewable energy is getting serious attention. Simply put, the investment environment is slightly more good than it is bad.

Occam’s razor outcome

The old law of Occam’s Razor is relevant here. Without consensus how can we decide what to do? The law says that the most obvious answer is the solution. For any given set of explanations for an event occurring, the simplest one is most likely the correct one. The simplest explanation of today’s markets is that investment conditions are slightly positive. While that news won’t grab any headlines, it is useful for investors. Keep investing in a diversified manner, favoring stocks. Again, lack of consensus is at work here.

Moving forward

It’s best for investors to discount bad news significantly. There is so much of it. Good news is tougher to find, especially in the media. You will know good news when you see it. Quarterly earnings season starts this week, and some stocks and sectors will jump based on reasonable results. On balance, we expect earnings season will end one month from now right where it began: slightly positive. If you would like to know how we are investing at Osbon Capital, please send us a note to find a time to talk.



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