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When Everyone is Convinced of an Outcome, Be Careful

CAMS Weekly View from the Corner – Week ending 6/10/2022

June 13, 2022

Back in the early fall season of 2021 we shared an edition with the above title. Back then the theme of consensus belief that we focused on was the energy space and how consensus had been green energy was the no-brainer investment with the expectation of high investment returns while the traditional fossil fuel sector was left for dead.

The implied point of the title was simply when everyone is convinced of an outcome it many times does not happen. There is no guarantee of this but the track record of consensus ending up on the wrong side of the eventual outcome is quite high. (Truly a subjective statement there so digest it accordingly.)

Fast forward to current day and we see green energy returns are double digit negative over the previous twelve months while fossil fuel sectors are up nearly triple digits.

In keeping with the theme for today’s edition, which is consensus belief, not the energy space, we will revisit an additional topic shared back in the early fall season of 2021 which had the same flavor of this theme relative to the housing market.

In that edition there was a shared experience on my part whereby seemingly everywhere I turned through that summer season someone would bring up the housing market and how “….any day now…” home prices will collapse. Importantly, these were not analyst discussions but rather everyday people from all walks of life living with the exact same conclusion. Interesting.

The result current day from that timeframe: Home prices went up double digits.

This brings us to current day with all of the above as a backdrop while keeping with my personal experience on two topics: Housing and the stock market.

In recent weeks in particular I have noticed one-of-two messages with a simultaneous price inflation overlay: “Look out below for housing prices” and/or “……it will come back….” when speaking of the stock market. Importantly, these are often unsolicited topics that find their way into the interaction be it verbal or written.

It is the unsolicited part that underlines how deep the consensus belief is running and that is important.

Relative to housing prices, this topic, in my experience, has gone nuclear if you will. I have been shocked how often I hear or read, be it from analysts or everyday people about the coming home price collapse which has elicited an involuntary verbal offering from within “….this has to be the most expected bear market, for a market, in history.”

Speaking of history relative to housing prices, back in the mid-2000’s when there was concrete evidence that the housing market was in serious trouble and whenever this was offered (with evidence) the consensus nearly screamed in response that nothing could stop the housing market. That was a very strong consensus that turned out very wrong.

Can These Two Collective Opposite Beliefs Prove True?

In total then, per my experience, the consensus is convinced home prices will collapse while simultaneously offering nearly zero discussion on the stock market’s already collapsing storyline other than to offer “…it will come back” with an assured confidence in such belief. Dear reader, sit with this for a minute and digest the significance in its contradiction.

That is, the asset class known as stocks which have been propelled to the moon on a valuation basis is of little concern relative to the asset class of housing which comparatively, while certainly expensive, has not compared to the stock market valuation moon shot.

Both are large asset classes that have benefitted enormously from the Fed’s excessive low interest rate policies, their printing press, their Quantitative Easing (QE) policies and the government’s massive free money distribution programs of you-name-it Covid relief Bills to name a few notables underlying the tremendous speculation in asset pricing at large.

We offer here, if the consensus proves to be correct (we are mentally open to this potential) on a housing price collapse we have confidence that the stock market will simultaneously show notable downside behavior from current levels.

To think that housing will experience some sort of scorched-earth price drop while the stock market takes it in relative stride is leaning into silly talk.

Do Markets Exist to Make the Most People Wrong?

The obvious answer is of course not.

With this though it is a strange phenomenon experienced by many long time market participants/observers who can chime in on this that at times, with enough experience in the endeavor that it seems markets exist in order to prove the most people wrong time and time again. Strange.

Even stranger, as time rolls on and each new cycle of consensus agreement develops in X-market backdrop it becomes hardened that said consensus view is a certainty – even with an abysmal track record.

This is not to say seeing a consensus view offers a guaranteed positive outcome by merely doing the opposite. What we can do is to raise suspicions upon seeing a hardened consensus view and question our own thesis toward that view. That is a good beginning point.

Additionally, can evidence be found that disputes the consensus view? On this note, often times, the consensus view is built more upon collective emotion than it is analytics. Upon adding in some unemotional analytics the emotional underpinnings disappear and the “oh oh” realization enters that the consensus may be off base.

For this edition we will not enter analytics for the two markets discussed as that is outside of the purpose of this piece. The purpose here is to highlight how consensus views are often incorrect and by consistently trusting in them can bring notable negative repercussions onto your financial well-being.

In coming weeks and months we will offer various views of the two markets to continue to monitor their behavior both independently as well as relative to one another. This is not new being we opened this topic last fall season and to date the stock market has performed very poorly when compared to housing.

As we offered back then: how about they both go down but stocks go down much more than housing? So far, that view is playing out. We will share more on these two markets in coming weeks and months. No matter the outcome, it will be unfolding over many months if not near-term years.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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