Why Stocks Don’t Mind Widely Watched Forecasts

Tuesday, the IMF unveiled its latest World Economic Outlook, which revised its projections for global growth this year upward to the fastest-expected pace in decades. Yet the fast growth isn’t evenly distributed—the IMF expects America and China chiefly to drive the acceleration. Pundits had two general reactions to these forecasts. One camp celebrated the fast growth, thinking it has economically sensitive stocks set to soar. The other fears a divergence between America and China versus pretty much everyone else stoking instability and a world of equity market haves and have-nots. But in our view, extrapolating anything from such forecasts is a stretch.

The IMF’s upward forecast revision was its second in three months. It now expects annual GDP for the whole world to rise 6.0% in 2021, up from January’s 5.5% projection. For a bit of perspective, global GDP hasn’t grown this fast since 1973, according to World Bank data. Big components of that: the IMF’s forecast for 6.4% and 8.4% US and Chinese GDP growth, respectively. While it has only been about a decade since China eclipsed 8.4% GDP growth, America hasn’t topped 6.4% since 1984.^[i]

Many take economists’ brighter outlook—not just the IMF’s—as a fresh sign markets will boom, favoring economically sensitive value stocks. The trouble? The fact so many expect fast growth means it likely has little power over markets. Beyond the IMF, private forecasts also show 2021 US growth surging. Presently, the median of 67 forecasts puts this year’s GDP growth at 5.8%.^[ii] But this isn’t a new development. A year ago, several were already publishing 2021 US growth forecasts above 6%. The same is true for China. Many private forecasters penciled in upwards of 8% Chinese growth last April.

What all these optimistic forecasts tell you: Expectations for fast growth are widely held, and that isn’t new. Markets are quite efficient—they factor in commonly held views, forecasts and expectations. So stock prices likely already reflect whatever growth jump we get this year. The question for markets going forward: What is beyond the bump? We think the answer probably disappoints value stock proponents. After the reopening surge everyone now expects, the rush likely fades.

As for the other camp, it seems many pundits worry this year’s American-and-Chinese led surge will leave other markets in the dust. Supposedly supporting this view: the IMF’s 4.4% annual growth projection for the eurozone in 2021, only a smidge higher than January’s forecast, and most of non-China EM growth below 5%. The IMF suggests these slower growth rates could scar their economies, leaving them permanently behind fast-recovering ones. Still others believe the disparities create soft spots in the world economy, leaving it vulnerable to shocks. But these conclusions don’t pass a basic logic test. Consider: When have countries with very different growth drivers ever moved in lockstep? The answer is “basically never,” with the 11-year long pre-pandemic bull market and global expansion a case-in-point.

Perhaps this is doubly true today given vaccine rollout issues in Europe and many developing nations, which prevent reopening—the real economic driver behind these big growth rates. But that doesn’t mean markets somehow can’t handle varying growth rates and even pockets of contraction. To be 100% clear: These delays have a very real human cost in terms of illness, death and societal impact. We are acutely aware of this and very sympathetic. But stocks are cold-hearted, and, like the aforementioned fast growth rates, they pre-price widely discussed issues.

Forecasts can be useful, but we don’t think they should drive investment decisions alone, and they don’t dictate where stock markets go. As big revisions imply, they aren’t super accurate. They are merely opinions—and ones usually following markets’ lead at that. Moreover, surging recoveries in countries reopening and sagging ones where they aren’t isn’t a shocking revelation for markets. We suspect almost anyone who may have been inclined to trade on the factors behind the IMF’s upgrade likely did so eons ago.