The news continues to have recirculated fears over inflation, US politics, a pending recession, and narrow market breadth, which have dragged 2024 expectations lower. Yet the economic reality is brighter than these fears imply, providing room for upside surprises.
With politics largely gridlocked throughout the developed world and sentiment broadly dour, reality has a low bar to beat expectations in 2024. Consequently, widespread recession forecasts have yet to materialize after two years of cost cuts and layoffs in anticipation of a recession that never arrived. And businesses have already taken cautionary measures to mute a potential recession if one comes.
Furthermore, negative sentiment could keep weighing on equities over the near term, but the current bull market’s backdrop looks brighter than most understand. Current economic conditions align with the second year of a new bull market, and political gridlock continues to reduce legislative risk in 2024. Better still, year four of the US presidential cycle lies ahead, extending political tailwinds globally, an underappreciated positive. So, 2024’s stock market returns are likely less robust than those of 2023 but appear poised for double-digit growth in the SP 500 INC and the TSX by year’s end.
With the current landscape of a slow but positive global economy and an inverted yield curve, businesses resilient to rapid growth, armed with substantial size and robust balance sheets, stand in a favorable position to secure funding in capital markets. However, the prospect of a yield curve re-steepening later in the year could usher in a shift towards value-driven investments. A re-steepened yield curve might trigger a global revival, benefiting more cyclical companies and enhancing bank lending due to a widened yield curve (the gap between short and long rates), creating a more profitable lending environment potentially channeling additional financing to smaller firms. Unfortunately, this outcome is not a substantial probability because the inverted curve did not have the anticipated impact on lending like in previous periods due to banks’ large deposit surpluses.
That said, it’s essential to note that despite potential positive shifts, volatility and corrections are inherent in all bull markets, possibly occurring at any time and for various reasons. However, such fluctuations are normal (and expected every year). Therefore, take a measured approach, acknowledge the uncertainties, and enjoy the prospects of another bull market year with plenty of fun irrationality along the way.
In capital markets, success demands more than financial acumen. It requires a keen awareness of cognitive biases that can cloud judgment and impede strategic decision-making. Let’s unravel and explore a few psychological phenomena that impact us, shedding light on pitfalls that influence our expectations and actions. You will likely notice many of the biases below are concepts we often discuss in our monthly articles when comparing expectations and reality.
Entrenchment Effect: Investors must guard against strengthening beliefs in the face of conflicting evidence. Valuing truth over being right is essential for adapting to evolving market conditions.
Availability Bias: Relying on easily recalled data can lead to skewed evaluations. Investors should seek diverse sources of information to avoid being overly influenced by the persistent negativity of the news cycle.
Naïve Realism: Acknowledging personal biases is crucial. Investors should recognize the subjectivity in their views and avoid assuming that dissenting opinions are rooted in ignorance or prejudice. This bias can be one of the hardest to combat.
Bandwagon Effect: Conforming to popular trends can cloud judgment. Investors should make decisions based on thorough analysis rather than succumbing to the pressure of mass opinion.
Baader-Meinhof Phenomenon: New awareness can create illusions of frequency. Investors should distinguish between actual trends and perceptual biases to make informed decisions. Have you ever purchased a new vehicle and started seeing that same car “everywhere” on the street?
Confirmation Bias: Seeking information that aligns with existing beliefs skews decision-making. Investors should actively avoid information that confirms what we already “think.” Look for information that disproves what you already think and try to understand if it has flaws or has the potential to be accurate.
Post Hoc Ergo Propter Hoc: Causation should not be assumed based on chronological sequence alone. We must critically analyze events to distinguish correlation from causation.
The Gambler’s Fallacy: Understanding probabilities is vital. Avoid the misconception that past events influence future outcomes. Example: 2023 was an excellent year for the stock market, so 2024 must be subpar (wrong). The probability is that 2024 will have returns closer to 20% than -5% or +5%, as many forecasters are predicting.
The summary for most biases should be to practice accumulating regret when you make mistakes, so you learn from your decisions and to shun pride when you have windfalls so you can learn to avoid overestimating your odds of success.