Are Wall St Analysts getting it perfectly wrong again?

August 12, 2022

Surprising no one at One Day In July, annuity salespeople have been out in force this summer. As the stock market dropped into a trough in May and June, annuity sales set an all-time record in the second quarter of $74 billion, surpassing the previous record of $69 billion, which was set, drumroll, at the bottom of the financial crisis. At the same time investors fourteen years ago were busy selling the market at the best time to buy it, Warren Buffett was on the other side of that trade, taking the shares off their hands at cheap prices.

Here is what he said in his famous piece published October 16, 2008:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

And perhaps more importantly, followed up with this:

What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Besides annuity sales, which seem to be a good reverse indicator of how to make money (buy the market when lots of people are buying annuities), what else can we look at as a signal that could have a little predictive value? Here's an idea:

The professional analysts on Wall St seem to be a relatively good signal. The graph above, published right around the recent market low in June, shows that when they get strongly pessimistic on stocks, they seem to be almost perfectly wrong, and returns are quite good going forward. Note that the reverse is not true: when they have been optimistic, it has often also been a good time to buy.

You can imagine the scene at an analyst firm. Mark, the junior analyst who is celebrating return-to-office and trying hard to impress his boss, carefully models the Intel earnings reports this spring, layering in some educated guesses about rumors of government chip subsidies. A bunch of reports get passed around and Sarah, another junior analyst, needs to say something, so chimes in: "the demand is coming off bitcoin miners fast. That dog won't hunt." And Jake the boss, who played a lot of lacrosse in college but doesn't have the faintest idea what a GPU does versus a CPU, can see it's not looking great. "What's the earnings number Mark? Is this landing coming in soft or hard?" And Mark delivers a lower earnings number that he says is backed up by some form of statistical analysis, and throws out a few hedges in case he's totally wrong, and out goes the report.

Investors, according to Bloomberg a month ago, on July 11th, have piled into the downward trend:

The latest flurry of downward revisions probably means little to investors who have slashed their equity exposure to multiyear lows.

As you may know, we don't have much confidence in predictive signals. This doesn't mean it's not fun to read analyst reports six months after they're published and see if they were right or wrong! And sometimes, as above, there can be a hint of predictive ability, though we can't be confident it will hold in all cases.

Dan Cunningham

<sup>1. Bloomberg "Stock Drubbings Convince Holdout Analysts to Get Real." 7/11/2022
2. The analyst scene above is apocryphal.</sup>