Protect your portfolio with higher quality holdings

A few years ago, I attended a conference organized by a Wall Street firm. One of the guest speakers, the CEO of a manufacturing company, turned to the hosts of the event and said, half-jokingly, “If I make a wrong prediction, I lose my job. If you make a bad prediction, you just make another one.

There’s some truth to that, but for better or worse, Wall Street analysts are in the business of predictions. Their accuracy isn’t great – between 2000 and 2020, the median forecast for the S&P 500’s percentage change for the year ahead would have missed its target by an average of 12.9 percentage points. But analysts face extremely difficult work to begin with trying to synthesize a huge amount of information while trying to account for unknown developments in the coming year.

And many analysts have been wrong this year. At the end of 2021, they were looking for a 5% gain this year, which if correct would be a nice climb from a 20% mid-year decline. Since then, many analysts have downgraded their forecasts, and in July even John Stoltzfus, Oppenheimer Asset Management’s chief investment strategist, who had been the most optimistic about the 2022 outlook, joined them.

Stoltzfus had just reiterated its original June target of 5,330, so its downward revision to 4,800 appears to be a significant acknowledgment of the market’s current struggles. Lost in the headlines, his longer-term optimism about the market and the economy and that even the 4,800 level at the end of the year represents a significant improvement from the 3,800 range in mid- July.

What’s curious about analysts’ new negativity about the S&P in 2022, however, is that by mid-July they had more or less stuck to their company’s earnings estimates for the quarters to come. According to FactSet, they actually raised earnings per share estimates for the July-September period from a year ago.

“So far, the ongoing bear market is the first in the millennium to show rising earnings estimates,” Jason Pride, chief investment officer for private wealth at Glenmede, wrote in early July.

One way to interpret this apparent contradiction is that the market’s decline could be primarily due to falling price-earnings ratios. Stock market valuations tend to fall during periods of inflation.

But another possibility relates to my earlier comment that analysts are in the business of prediction. To be exact, they are in the prediction-revision business. And analysts might be too busy seeing the forest for the trees.

As Nobel Prize-winning economist Paul Samuelson once said in response to criticism from the Associated Press when he changed his mind about an acceptable rate of inflation: “Well, when events change, I change my mind. What are you doing?” So if analysts start to take a closer look at company-specific issues and revise earnings lower, we could well see a further decline in the market.

For individual investors, this negativity can be difficult to manage. The best course of action is to prepare for what history tells us will eventually be a market rally. Look to bolster your portfolio with higher quality securities and perhaps take advantage of the tax-loss sale.

Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a member of the Forbes Next-Gen Advisors 2018 list and a finance professional at Avantax Investment ServicesSM. Evan leads a team of retirement transition strategists for clients who consider themselves the “millionaire next door”. He can be reached at 941-500-5122 or [email protected] To learn more about his ideas, visit Securities offered by Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered by Avantax Advisory ServicesSM, insurance services offered by an insurance agency affiliated with Avantax. 8225 Natures Way, Suite 119, Lakewood Ranch, FL 34202.

Comments are closed.