October, 30, 2023 - read
“Why don't you knock it off with them negative waves? Why don't you dig how beautiful it is out here? Why don't you say something righteous and hopeful for a change?” Oddball from Kelly’s Heroes (1970). Oddball and his tank moved through WW II Europe to help steal gold from the enemy with a bunch of other military misfits. On the way, they formulate a plan which required them to traverse a river. The question brought up by someone in his group as to whether a bridge had already been bombed out. When they got to the river, they found the bridge was blown and Oddball said his companion’s negative ways had jinxed them.
The Citi U.S. Earnings Revisions Index is calculated as the ratio of analysts' earnings per share revisions to listed companies tracking equity analyst revisions upgrades (positive) vs. downgrades (negative).
The most recent high for the S&P 500 occurred 28 July 2023 and was about 4589. The S&P 500 has since meandered down to 4107. The last 6 weeks have seen a deterioration of the Citi US Earnings Revision Index that has matched this downward trend, according to the graph above, with increasing acceleration. Analysts spend lots of time studying individual companies which comprise the S&P 500; they “live” these companies as a matter of profession – the question is whether their sentiment carries over into the performance of the market. Does positive sentiment portend market outperformance and, conversely, does negative sentiment portend market underperformance? Do the “negative ways” from the analysts affect the market?
Proof by picture is a pejorative phrase in mathematics because it is a lazy way to prove something without strict formalism, however, it is a perfectly acceptable way to disprove something! Let us re-examine the picture above. The recent weeks have shown earnings downgrades and market underperformance move in lockstep with one another, this is true. The run-up in the market to early July of this year coincided with an earnings downgrade (red). Maybe earnings sentiment is important but not determinant in and of itself.
The follow-up question is what should be done if you believe the market is going down? That is a question that begets other questions for want of specificity – how far down it will go; how long it will be down; what else will be down in concert with the market; will it flatten out or rebound up; is the deceleration great or small? The portfolio discipline we advocate is to remind ourselves that we are investors, not traders. Market timing is difficult and even the experts get it wrong. No firm, great or small, is immune from this quasi-law of the markets.1
The follow-up answer is diversification. We don’t know what will happen or when, but if we construct our portfolios with diversification as a central tenet, then we worry less about short to medium term market moves. Volatility is part of the market. Attempting to neutralize it may only cost in the long run because that volatility is the source of upward movements as well as downward movements. Volatility can be scary, but a well formulated portfolio discipline can go a long way to quelling the apprehension.
1 Does Market Timing Work? Schwab Center for Financial Research. September 13, 2023 https://www.schwab.com/learn/story/does-market-timing-work
Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Please remember to always speak with your individual advisor before making any investment decisions.