Wall Street is sometimes right to be wrong: Morning Brief

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On Oct. 23, the yield on 10-year Treasury notes topped 5% for the first time since 2007.

On Oct. 27, the S&P 500 entered a correction.

Last Monday, one of Wall Street’s biggest bulls cut their outlook for the index.

The next day, the S&P 500 closed out its third-straight losing month.

In just the last few days, most of these developments have reversed.

On Friday, the S&P 500 finished off its biggest weekly rally in a year, with the benchmark index rising nearly 6%. The 10-year yield, bolstered by commentary from Fed Chair Jerome Powell on Wednesday and Friday’s soft October jobs report, rallied roughly 40 basis points to settle near 4.55%, its biggest weekly gain since March.

Tech and small caps led stocks higher, with the Russell 2000 rising by the most last week since February 2021. Bitcoin reached its highest level since May 2022.

Taken together, this market action invokes one of the defining phrases of the economic moment: We are so back.

But in the wake of these sharp reversals in the equity and fixed-income markets, some in the investment business are left with just-revised outlooks that look less than prescient — stock bulls turn cautious at the lows, strategists call for a 5.5% yield on the 10-year concurrent with its return to 4.5%. More pockmarks on a business that just can’t seem to get it right.

Then again, this week’s market action and each of these reversals also served as another powerful example of the timeless investor psychology lesson embedded in one of Warren Buffett’s most famous quotes: “Be fearful when others are greedy, and be greedy when others are fearful.”

Moreover, we’d argue this week is less an example of the folly of forecasts and more an example of what analysts and strategists are really there to offer investors: a prompt.

Because the audience for investment strategists is not quite an investing public looking for ideas or action plans. Rather, it’s a professional investment community that already has them.

Financial advisors, hedge fund traders, and mutual fund managers all have mandates they must abide by, client money coming and going, and strategies already taking effect.

Traders work on the floor of the New York Stock Exchange during afternoon trading on November 03, 2023 in New York City. (Photo by Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)

Their industry peers tasked with offering recommendations to buy, sell, or hold various stocks, themes, sectors, or asset classes are not offering an exhortation to do as much. Rather, these opinions and forecasts are starting points from which managers might consider whether the relative weights of their portfolio are properly calibrated.

A new recommendation to buy a certain consumer name may, perhaps, prompt a portfolio manager to examine their own exposure to the sector, or perhaps do their own homework modeling that business. And some investors will buy or sell something based on the opinion of an analyst. But in the highly regulated world of investment management, these decisions are always caveat emptor.

In an interview with The Wall Street Journal last week, Berkshire Hathaway vice chairman Charlie Munger said, “I think fewer and fewer people are really needed in stock picking. Mostly it’s charlatanism to charge 3 percentage points per year or something like that to manage somebody else’s money.”

Research suggests that if you are in fact being charged 3% per year for your money to be managed, you’re probably getting ripped off. But part of Munger’s critique is based on a reading of Wall Street’s daily firehose of opinions and warnings that are more prescriptive in theory than in practice.

Hollywood’s portrayal of yesterday’s stockbrokers cold-calling doctors to pitch stocks has been replaced by a room of CFA’s running sensitivity analyses on how portfolio betas change after adding 75 basis points of exposure to cyclicals across three strategies.

No matter how you make your living, no one wants to be wrong, and no one likes it when they are. But sometimes on Wall Street, you’re in the right to be wrong.

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