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Be Careful of Consensus

by Mike Sullivan , Vice President of Wealth Management
January 14, 2025

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Be Careful of Consensus

“We have fallen upon evil times, and the world has waxed old and wicked. Politics are very corrupt.”
Inscription on a stone from Chaldea, 3800 BCE

So often as investors we are beset on all sides by pessimism, naysayers and fear.  Long term wealth creation and preservation requires overcoming these anxieties, lest we be paralyzed to the point of inaction.  Similarly, when stocks roar back to life and optimism abounds, it may be expedient to buck the consensus and proactively rebalance to boost your portfolio’s margin of safety.  After yet another year of remarkable U.S. stock market growth, dollar strengthening and economic gains, I want to share a few examples representing the pitfalls of following the consensus around gloomy prognostications when the outcomes were instead positive.   

2024 Consensus Equity Forecasts – Meh versus Wow

Although GHPIA is loath to make short-term market forecasts, every year the top investment banks and research firms have their head equity analysts submit predictions for stock market returns for the following year.  Although bold and headline grabbing, there is folly in trying to predict the future with any kernel of certainty. 

When reviewing 2024 S&P 500 forecasts from 17 of the largest and most reputable investment banks and research firms (see Chart 1), the consensus average pegged returns of approximately 2% (highlighted by the gold bar in Chart 1). Notably, seven of these firms projected losses for the index this year (red bars in Chart 1).  Of course, the actual performance of the S&P 500 was a booming 23% (green bar in Chart 1).  

Chart 1 demonstrates S&P 500 return estimates versus actual returns

In providing their more subdued estimates, analysts noted concerns over high interest rates, stubborn inflation, recession risks, election fears, geopolitical instability, lofty technology stock prices, etc.  Of course, what actually transpired was cooling inflation, rate cuts, and impressive U.S. economic resilience.  Our long-term investment strategies are never influenced by the annual outlook from these firms.  Clearly, 2024 offers solid examples of the impossibility of predicting the future, and how much reality can differ from consensus.   

Financial Crisis Era Consensus for the U.S. Dollar Was Wrong

I had the exceptional timing of joining GHPIA in April of 2008, only one month before Bear Stearns went on life support and was purchased by JPMorgan Chase, heralding the beginning of the Financial Crisis. I don’t miss those days. Before the crisis began, the size of the Fed balance sheet was less than $1 trillion.  What ensued was an unprecedented era of Fed monetary stimulus which included three rounds of quantitative easing, increasing the size of the balance sheet to more than $4.5 trillion by 2015. Further, the Fed slashed interest rates to virtually 0% and kept them there for years to prop up the anemic U.S. economy.

From a consensus standpoint, ultra-low interest rates, economic hardship, and printing money (i.e. expanding the size of the Fed balance sheet) was a perfect recipe for long-term currency weakness. Much was written and argued during those Fed stimulus years that the U.S. dollar would suffer a potential collapse, thus dislodging the greenback as the world currency reserve. 

The doom and gloom outlook for the U.S. dollar would resurface again during the next round of Fed balance sheet expansion and rate cuts as Covid emerged in 2020.  For that matter, the Financial Crisis era of printing money paled in comparison to the nearly $5 trillion in stimulus that was added during the initial Covid years. Rather than follow along with consensus projections for weakening, the U.S. dollar strengthened remarkably in the years following the Financial Crisis, and once again in the years after Covid struck. When compared to a basket of other major world currencies (including the euro, yen, pound, etc.), the U.S. dollar index muscled its way to approximately 50% growth since April of 2008 (see Chart 2).

Chart 2 demonstrating U.S. Dollar Index

As an aside, thanks to a recently strong and resilient economy, the Fed’s balance sheet has been reduced by $2 trillion, thus peeling back some of the enormous Covid era stimulus.

Once again, this year there has been clamoring from a handful of world leaders, threatening to abandon the dollar when engaging in foreign trade.  We view this as an unlikely development, consistent with our comments on the dollar’s hegemony last year.  Further, while acknowledging President elect Trump considers a weaker dollar beneficial to boosting U.S. manufacturing and shrinking the U.S. trade deficit, he has also explicitly supported maintaining the dollar’s prominence as the world’s currency reserve.  Although those two goals conflict, our view remains the U.S. should fight to reduce foreign trade barriers.  The dollar’s heft, even if somewhat weaker going forward, will perpetuate our trade deficit. 

U.S. Economic Growth Relative to other Wealthy Countries – Post Aught Exceptionalism

As a final example of the perils of consensus, once again I draw upon the dark times of the Financial Crisis.  Similar to the ominous warnings for the devaluing of the U.S. dollar, many economists and research firms projected a sober future of U.S. economic stagnation after the housing bubble burst, credit markets seized, and mass unemployment crippled the markets. 

To embolden those forecasting lackluster growth for the U.S. economy, the years preceding the 2008 Financial Crisis witnessed significant international outperformance of U.S. stocks as markets heavily rebalanced following the .com bubble collapse at the turn of the century.  Remember the “lost decade” for U.S. stocks?  Again, I don’t miss those days.  Meanwhile, the Chinese economy was on the march and predictions abounded that China would overtake the U.S. as the world’s largest economy.

Instead of stagnation, U.S. economic growth was exceptional and unrivaled.  Chart 3 displays the massive gains and outperformance of U.S. GDP per capita with respect to 7 other major world economies since 2008.  In absolute terms, our GDP of nearly $30 trillion remains the envy of the world, but per capita analysis is always a more useful metric for comparison as, of course, countries have vastly different population sizes.  On a per capita basis, Chinese economic growth appears far more pedestrian, while Japan and Canada experienced contractions post-Covid.  Meanwhile, the U.S. economy grew by more than 80% per capita since the Financial Crisis nadir in 2009.

Chart 3 demonstrates GDP per Capita based in U.S. Dollars from 2008 to 2024

The Age-Old Balancing Act – Be Levelheaded about Risk and Reward

Worrying about corrupt politics or a world waxing evil and wicked is not just a 2024 phenomenon.  Embracing commonly held premonitions over future dangers is as old as humankind.  The key is to accept those risks that are always with us, sensibly prepare for the occasional setback, and then boldly forge ahead. 

Equally as destructive to becoming paralyzed by fear, is letting positive stock market trends intoxicate us with greed or, even worse, fearlessness.  The ongoing rally in 2024 for technology stocks, boosted by the advances of artificial intelligence, may thud back down to Earth in the years ahead.  Therefore, sensible portfolio diversification is necessary. 

Likewise, recently alluring gains for Bitcoin and other cryptocurrencies should be viewed with a heavy dose of caution as this nascent investment category still carries considerable speculative risk.  Although innovations in AI and crypto may prove transformative, it remains highly questionable if long-term value will live up to their currently soaring asset prices.  Consensus can be dangerous on both sides, and a little skepticism never hurts.

As 2024 goes out like a lion for U.S. stocks and the economy…did I mention I don’t miss 2008?!


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GHP Investment Advisors, Inc. Benchmarks are determined using any combination of valuation approaches deemed relevant by GHPIA, including Price to Earnings (P/E), Price to Cash Flow (P/CF), and Price to Book (P/B), and other relevant analyses. Consideration is given to such factors as historical and projected financial growth for the company, profit stability, leverage, the quality of earnings, valuations of comparable companies, the size and scope of the company’s operations, the strengths and weaknesses of the company industry information and assumptions, general economic and market conditions, and other factors deemed relevant. While Benchmarks are based on valuations and assumptions that GHPIA believes are reasonable under the circumstances, actual realized returns on such investments may differ materially and do not take into account any fees or expenses that may be associated with investing in those assets. There is no assurance that the investment objectives and strategies described herein will be achieved or successful. P/E, P/BV, and P/CF data are provided by FactSet.

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