May 17, 2022


Skillful Business Crafters

Stock Market Optimism Deteriorates – What’s Next?

“Successful investing is anticipating the anticipations of others” (Economist John Maynard Keynes).

Wall Street’s 2022 anticipations are still bullish, but now with crossed fingers that the U.S. and world economic setbacks are truly temporary:

  • Covid reversals
  • Employment issues
  • China’s weaker growth
  • Price/cost inflation
  • Commodity/product shortages
  • Shipping bottlenecks
  • Rising interest rates
  • Stalled government spending/taxing actions

Earnings season bailout? The timing looks poor

This week’s launch of the third quarter earnings reports is being greeted with less enthusiasm than last quarter. (Barron’s, Oct. 11 – “This Earnings Season Has Markets On Edge.“)

The problem is the normally sunny July-September period had those setbacks operating in full force. Non-calendar-based companies reporting June-August results (e.g., Nike), have already provided a glimpse of weaker-than-expected results.

Therefore, Wall Street will need to put its main anticipatory weight on management outlooks. However, company insiders are in no better position to determine the future U.S./global economy effects of the current setbacks. What we do know from their public statements is that those issues continue to adversely affect many industries and businesses.

Then there is the problem of timing. The normally strong October-December quarter is here, but so are the setbacks. That means management outlooks for the period likely will be muted and of less help than usual in anticipating growth next year.

Therefore, Wall Street’s traditional 6-month look ahead will necessarily lean more on the following first quarter of 2022. However, that means starting out on a weak foot – the cold, dark, economically weak January-March quarter.

While economists can seasonally adjust (i.e., improve) the normally bleak data, reality could extend some of those “temporary” setbacks.

Isaac Newton’s descriptions provide insight

Current conditions carry an as-yet unmentioned concern: perpetuation. It is the observation that the investors and Wall Street are susceptible to turning lingering negative effects into bearish thinking. Per Isaac Newton (underlining is mine):

“Newton’s First Law of Motion states that a body at rest will remain at rest unless an outside force acts on it, and a body in motion at a constant velocity will remain in motion in a straight line unless acted upon by an outside force.”

“The Second Law of Motion states that if an unbalanced force acts on a body, that body will experience acceleration ( or deceleration), that is, a change of speed.”

The setbacks listed above are the “unbalanced forces” that have caused the market’s deceleration so far. However, the “temporary” descriptor and the previous widespread bullishness likely have kept the negative effect in check. That brings in Newton’s “inertia” explanation.

“The property that a body has that resists motion if at rest, or resists speeding or slowing up, if in motion, is called inertia. Inertia is proportional to a body’s mass, or the amount of matter that a body has. The more mass a body has, the more inertia it has.”

When talking about the stock market as a body in motion, “mass” is not the size of the market. Rather, it’s the size of investor strength supporting the stock market’s trend. At mid-year 2021, that strength was sizable, built on the economic recovery, the market’s strong steady rise and building investor optimism, including a variety of popular fads.

Therefore, while the unbalanced forces have tempered the market’s rise, the inertia (often referred to as investors willingness to buy on a dip) is at risk of diminishing as those forces extend their presence.

The bottom line: “Temporary” “unbalanced” forces could become the stock market’s key drivers

That realization is the basis for anticipating that the Wall Street bullish 2022 anticipation could weaken. The longer the adverse forces extend their stay, the more likely the bullish inertia will shrink and even give way to bearishness. Additionally, at that point, the stock market would become more susceptible to any new unbalanced forces, thereby increasing volatility and perceived risk.

Therefore, a good strategy is to hold some cash reserves to take advantage of potential opportunities from such a shift.