Why You Should Expect The Unexpected

It sounds trite, but today’s world is messy and that means anything can happen. The same’s true for investing, where there’s no such thing as a sure bet.

🕰 Recap

• At the turn of the year, Wall Street experts were down in the dumps and had some pretty gloomy predictions for US stocks.
• And, of course, they did: inflation was smoking and economies were cooling. Faced with this hot-and-cold monster, US firms were fully expecting a nasty profit recession.
• But with six months behind us, 2023’s turning out to be anything but an annus horribilis.

✍️ Connecting The Dots

How many times do you need to be surprised before you learn that surprises shouldn’t be surprising? Well, surprisingly, quite a few. You’d think experienced and investment-focused professionals would take all this into account when making their market predictions. But wrapped up in the zeitgeist of the moment, professional strategists often seem more tempted to jump on the bandwagon than go against the grain. And it makes sense. Imagine being a Wall Street guru and popping your head above the parapet at the end of last year and calling for the S&P 500 to hit 4,400 within six months. At best, your boss would have laughed, and at worst, well…

So time and again, analysts seem to extrapolate what’s going on today rather than entertain what surprises could be around the corner, despite the fact that surprises, ironically, are frequent. That’s why when oil was above $100 and rising, it was easier to say it would rise further. And with gloomy economic headlines everywhere at the end of last year, and stock markets struggling, the consensus among experts was that US companies' profits would drop in 2023 – by as much as 20%, some said. Six months later, analysts now expect 2023 S&P 500 profit to be slightly higher this year than last.

There are two lessons here. The first is that buying good companies and sitting tight is rarely a bad stock strategy. The second is to not go blindly against what the strategists are saying, but instead to entertain the idea that an entirely different outcome might play out. Being contrarian for the sake of it is not a good ploy, as surprises, by their very nature, don’t happen all the time. But by considering a range of outcomes, you’re able to make better risk-adjusted decisions than just assuming that what the strategists think will come to pass. After all, had you embraced the notion that US company profits would do better than most thought back in January, you might have been better positioned and not surprised by the strong market gains this year.

🥡 Takeaways

1. Stocks were an inflation hedge, after all.

With the prospect of a profit recession and higher interest rates, it seemed everyone forgot that, in theory, stocks can be a good place to park your money during inflationary periods. The reason is that most companies can pass cost increases on to their customers through higher prices, thereby protecting profit growth. That pass-through becomes even easier when everyone’s feeling the cost-pressure heat. So, the S&P 500’s up around 12% over the past year, and that’s quite a bit more than inflation and means that stock investors have enjoyed a positive real return (that is, after inflation).

2. Buy low, sell high.

There’s one area where investors can turn the idea of thinking out of the box to their advantage – commodities. See commodity prices – unlike stock prices – are bound by the laws of supply and demand. When strong demand pushes prices higher, supply increases to meet that demand. At the same time, high prices choke off demand, so elevated supply and sunken demand eventually clobber prices. And then it starts over. Stock prices don’t work like this. They’re a function of demand, sure, but that demand over the long run tends to be generated because of things like sales and profit growth. What’s more, even as stock prices rise, supply remains entirely unchanged. In fact, available supply (think: people wanting to sell) can actually shrink as prices rise. That’s why buy-and-hold strategies can work so well in stock investing. When it comes to commodities, though, remembering the old adage of “buy low and sell high” will stand you in good stead.

🎯 Also On Our Radar

Biotech startup Insilico Medicine announced this week that its new lung disease therapy was the first drug entirely developed by AI technology. The drug has reached phase-two clinical trials and the company’s hopeful it’ll go further. That’s exciting: investors are already all aflutter about AI’s ability to save firms’ money. Imagine how they’ll feel if it can also save people’s lives.