💡Some thoughts on intellectual honesty

Hey hey, happy Monday!

This week’s post is a little different from what I usually talk about, but I promise it’ll be worth an extra two minutes of your time.

Consider it a rant that I couldn’t hold in any more.

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I knew this would happen eventually.

It’s Saturday morning, and I had a really good post about how markets move 90% done for y’all.

Now, I’m fired up about something completely different, and I just made my third cup of coffee. So I’m ripping my draft and starting from scratch.

Don’t worry, you’ll get the other post next week.

I want to share a few thoughts on intellectual honesty in my line of work.

And to get there, I need to fill you in on Fed chair Jay Powell’s speech at Jackson Hole.

On Friday, Powell — who leads the group of nerdy academics responsible for balancing the economy through interest rates — stood in front of a room of economists, world leaders and journalists and declared the inflation crisis is over.

In no uncertain terms, either:

Powell just declared that our long national inflation nightmare is over, and that the Fed’s biggest focus will be on the job market going forward.

His words got me thinking about how we’ve come, especially since Wall Street’s great recession panic of 2023.

These are some of the headlines that graced our news feeds back then. 

From Bloomberg:

The Economist:

USA Today:

Almost every strategist — talking head, analyst, whatever you want to call us — saying stuff like this.

And boy, were were wrong.

Instead of a crisis, we saw:

• A better-than-average year (the economy grew an inflation-adjusted 3% in 2023).

• A surge in worker productivity

• A third year of historic travel spending

• A 24% gain in the S&P 500.

All because of the job market.

Today, Wall Street cares a lot about jobs data, especially now that the Fed is anchoring policy on it.

But in reality, the job market should’ve been the focus all along. 

Here’s what I mean. While your favorite forecaster was busy tossing around the R-word, these are the types of numbers we were getting from the job market:

• Companies added an average of 200,000 jobs per month – including recent revisions – the fifth-strongest pace of hiring in any year this century.

• The unemployment rate fell to a 54-year low of 3.4%.

• 80.9% of 25-54 year old Americans were employed, a 22-year high.

Yes, inflation was intolerably higher, market recession indicators were going haywire, and the manufacturing and housing sectors were frozen over. Yet people were employed, making money and spending money like the good members of a capitalist society we are.

This is incredibly important. Consumer spending is 70% of the US economy. It is very hard to have a recession when Americans are doing well financially.

I don’t want to oversimplify the complicated ecosystem that is the largest economy in the world. But when one factor holds that much weight, you can’t get too tangled up in other distractions.

Experts sold their intellectual rigor for air time and retweets. Talking heads who pride themselves on media spotlights and public pontifications got caught up in bad vibes.

And you, the investor, paid the biggest price for Wall Street’s attention grab. The S&P 500 is now up 58% since October 2022, yet cash levels are at all-time highs and people are still insisting that markets have it wrong.

News flash: when it comes to your portfolio, markets never have it wrong.

You missed out.

I get pretty heated about this.

Not only because I never bought into the recession hype (yes, I brought receipts). But because you deserved better from us.

Intellectual honesty should be at the heart of everything you hear from Wall Street.

And right now, the incentives for market experts are all messed up. We make a living from boosting brand awareness through media hits and TV spots. Our reach and volume — not our thorough analysis — are how our (short-term) success is measured.

Many experts aren’t even paying attention to everyday people – they’re pining for attention from big firms and hedge funds. But millions of people read the headlines and tune in every day. As they should — where else can you go? TikTok?

To be clear, you won’t ever find a strategist who’s right all the time. Nobody has a crystal ball.

But the best strategists:

• Talk about different scenarios, not in absolutes

• Stay intellectually true to vetted series of hard, high-fidelity data

• Focus intentionally what makes the economy and markets tick

• Make their thought processes public

• Disclose their timeframes – or in other words – talk about if their beliefs hold true for the weeks, months and years ahead

• Address the counterpoints to their argument

• Regularly say “I don’t know”

• Talk in plain English without wrapping their analysis in vague phrases (“cautiously optimistic”)

• Don’t tell you what to buy or sell, but how to think about what’s going on

And most importantly, they keep optimism as their default setting (s/o to Josh for this excellent phrase). Good analysts point out the risks, but they don’t try to hide the most compelling takeaway from hundreds of years of market returns and economic cycles:

Over time, the American stock market has grown consistently through ideas, progress, innovation – and ultimately, higher business profits.

In the past 100 years, the US economy has grown 83% of the time. The US stock market has gone up 75% of the time over the same period.

The pessimists may have been louder, but the optimists have made money.

Still we live in a world of 280-character tweets and goldfish attention spans. It’s the perfect petri dish for pessimists.

Sorting fact from fiction is hard work. Pessimism is alluring to our risk-averse brains, and easily digestible narratives can be seductive.

So you – as the discerning consumer of all this information – have to make your own decisions about who to watch and listen to.

But you must search for intellectual honesty, especially when you’re making decisions about your life savings. Wall Street won’t make it easy for you.

As for me, I will always be focused on giving you the most data-centric, understandable insights around.

Here’s my stance right now:

While the economy is in a danger zone of sorts, I won’t believe we’re in a recession until I see proof in the job market. After Powell’s latest comments, it sure seems like the Fed has a good chance of saving us if a crisis really is around the corner.

If that happens, there’s still a big risk in sitting this market out because you believe everything is falling apart.

After all, over the past seven decades, bull markets have averaged 5.4 years in length and ~20% in annual gains. We don’t talk enough about that.

Whew, that was a lot. I need another cup of coffee.

If you’re fired up now, here are some of my favorite intellectually honest market minds:

Neil Dutta (Renaissance Macro). He’s been one of the most spot-on economists in this business cycle, and he was one of the few brave enough to talk about how strong the economy was with his chest. He is as tied to the data as they come, and it’s steered him well. Neil deserves all the claps for how he’s navigated these past few years.

Claudia Sahm (New Century Advisors). She’s a former Fed economist/the creator of the Sahm rule, and she recently spoke out about how her namesake indicator might not apply in this cycle. Can’t get more honest than that.

Gina Martin Adams (Bloomberg Intelligence). I have always adored Gina’s data-driven approach to research, and she’s now doing incredible work at the most data-rich firm on the planet. Gina also has such a knack for finding unique ways to look at some of investing’s biggest challenges.

John Lynch (Comerica). John was my first chief investment strategist boss, He taught me a crash course on how to see the world through data. I wouldn’t be here without him and his willingness to take on a young analyst eager to learn. By the way, John and Gina worked together at Wells Fargo. The fact that two of the best came from the same training is more than a coincidence. 

Jim Paulsen (Paulsen Perspectives). Jim was one of my favorite strategists to talk to in my early years as a reporter. He’s on his own now, but he’s a shining example of how you can build a lasting career from sound, smart observations. He also spent most of his career at Wells Fargo. I’m noticing a trend here.

My colleagues. Josh, Michael, Ben, Matt, Sean and I have a 24/7 research chat where we digest and pick apart everything the other is saying. We hold ourselves – and others – to an incredibly high standard when thinking about the investment implications for our clients. Ritholtz Wealth Management takes intellectual honesty – and your money – incredibly seriously.

Now, go catch up on some (intellectually honest) reading and R&R this Labor Day weekend.

Thanks for reading!

Callie

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