In our experience, there is no one, perfect way to measure sentiment—it is more art than science. Gauges like investor and consumer confidence surveys can help. But, beyond such quantitative metrics, another way we gauge the broad mood: What are financial headlines saying? We have recently seen an uptick in warnings of forever changes (i.e., allegedly long-term shifts in economic or market trends) amongst financial publications we monitor, and most of them are negative, tied to current events. In our view, this is further evidence of widespread pessimism, setting a low bar for reality to clear—a reason to think 2022’s downturn may not have much left in the tank, as difficult as that may be to fathom during bouts of sharp volatility.[i]
The dour forever changes purportedly taking hold run the gamut based on our coverage. For example, we have seen some analysts argue the selloff amongst big US Tech companies signals the party is over, with their leadership coming to an end and struggles the new norm.[ii] We see it in experts’ hyper-focus on the Tech-heavy US Nasdaq Composite Index’s returns—with some invoking comparisons to the early 2000s’ Tech bubble—as well as the many anecdotes of venture capital funding drying up—hinting at a potential new dark age for Silicon Valley startups.[iii]
Beyond stocks, we have observed some economists posit the economy is moving to an era of permanently higher inflation, reversing the trend from the past three decades.[iv] These arguments theorise those elevated prices are, in turn, forever altering consumer spending patterns, and some economic observers think those higher prices will drive people to favour cheaper goods over more expensive experimental products—a trend they argue would stifle innovation. Elsewhere, we have seen others discuss the possibilities that two of the biggest stories over the past two years—COVID and supply chain issues—are permanently changing the global economy’s structure. Our coverage has found speculation COVID has forever rewired labour markets or that today’s global supply chain system is untenable, so the future is regional networks—thereby spelling the end of globalisation.
We think investors benefit from being cautious with these forever change projections, as extrapolating the present far into the future is textbook recency bias (taking what just happened as a sign of what is to come)—a mistake for investors, in our view. Recent developments may appear to be the beginning of long-lasting trends, but based on our study of history, many purported paradigm shifts petered out. Cryptocurrencies have been discussed as the future of money for years based on financial headlines we monitor, yet they have shown scant evidence of possessing the necessary qualities of money—i.e., having a stable, predictable value to facilitate exchange—given their extreme volatility.[v]
Or go back to the throes of the pandemic, when we observed some experts say “the world may never recover its thirst for oil,” arguing global oil demand may never regain its 2019 record high.[vi] Two years later, demand surged back—and shows no signs of abating, notwithstanding the temporary hit from China’s latest lockdowns.[vii] Or what about workers forced into premature retirement because of COVID, thereby forever modifying the US labour market? A recent analysis shows some 1.5 million retirees have reentered the jobs market over the past year.[viii] Reasons vary, from financial necessity to personal choice, but to us, that forever change doesn’t seem to have lasted.
We think these projections are useful primarily for what they say about sentiment—and how dreary it is today. Such stories are a useful sentiment indicator, in our view, as they both reflect and impact investors’ feelings. In our experience, forever projections that extrapolate current conditions are often a hallmark of sentiment extremes—both irrational optimism and unwarranted pessimism. On the irrational optimism side, go back to early 2021, when narrow corners of the market—e.g., cryptocurrencies and non-fungible tokens (NFTs)—received a ton of attention amongst financial publications we monitor. We noted how proponents called the former the future of money bringing forever change to the modern financial system whilst the latter were supposed to be the next big thing in art in our increasingly digitised world. In 2000, our research found plenty of headlines heralded the “New Economy” of the 21st century, one in which the economy would only expand and never contract again—and Internet companies would lead the way into this brave new world.[ix] In both cases, we don’t think these wildly optimistic projections came close to the mark.
On the unwarranted pessimism side, see 2020, when many observers we follow argued the pandemic ushered in a permanent new normal. We encountered many analyses discussing how business and leisure travel would never return; remote working would be permanent across the board; even common greetings (e.g., handshakes) would go the way of the dodo. Another example: fears of oil as a stranded asset (something that no longer has material long-term value due to economic, political and/or sociological changes) back in 2016. At that time, oil prices had plunged from over $100 a barrel in mid-2014 to a little over $30 a barrel in early 2016.[x] That, combined with governments’ push to transition to low-carbon economies, had many experts we follow arguing oil’s price was set to be forever lower, thereby roiling big oil companies—which could then spill over to the financial system. But all those conclusions proved hasty, as today’s oil prices make rather clear, in our view.
This isn’t a criticism of any particular forever change forecast. Rather, our point is more illustrative: When headlines zero in on the present and extrapolate it ahead endlessly, extreme myopia (focus on the short term) is dominant—and we think that is the case today. Now, it is possible some forever changes come to pass, and they may have a big impact in the distant future. But such developments tend to fade into the long-term backdrop quickly, according to our research. They aren’t the cyclical drivers impacting demand for stocks over the next 3 – 30 months—the most critical consideration for investors when it comes to portfolio decisions, in our view.
[i] Source: FactSet, as of 23/5/2022. Statement based on MSCI World Index returns with net dividends, in GBP, 3/1/2022 – 20/3/2022.
[ii] “The Party’s Officially Over for At-Home Tech Stocks,” Daniel Howley, Yahoo! Finance, 11/5/2022.
[iii] “What Comes After the Easy Money Era Ends for Cash-Burning Tech Companies in Silicon Valley,” Eric Rosenbaum, CNBC, 19/5/2022.
[iv] Source: Office for National Statistics, as of 23/5/2022. Monthly UK CPI, year-over-year change, January 1989 – April 2022.
[v] “Crypto Assets Shed $800 Billion in Market Value in a Month,” Medha Singh, Reuters, 10/5/2022. Accessed via The Straits Times.
[vi] “The World May Never Recover Its Thirst for Oil,” Julia Horowitz, CNN, 29/4/2020.
[vii] “Analysis: Oil's journey from worthless in the pandemic to $100 a barrel,” David Gaffen, Reuters, 24/2/2022. Accessed via Yahoo! Finance.
[viii] “Millions Retired Early During the Pandemic. Many Are Now Returning to Work, New Data Shows,” Abha Bhattarai, The Washington Post, 5/5/2022. Accessed via Yahoo! Finance.
[ix] “Brave ‘New Economy,’” M. Corey Goldman, CNNMoney, 22/5/2000.
[x] Source: FactSet, as of 18/5/2022. Statement based on Brent Crude Oil spot prices, June 2014 – January 2016.
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