What Forecasts of a Dire Distant Future Reveal About Sentiment Now

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 metrics, one way we gauge the broad mood: What are financial headlines saying? We have recently seen an uptick in warnings of “forever changes,” 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 believe 2022’s downturn may not have much left in the tank, as difficult as that may be to fathom during bouts of sharp volatility.

The dour forever changes purportedly taking hold run the gamut. For example, some analysts argue the selloff among big Tech companies signals the party is over, with their leadership coming to an end and struggles the new norm. We see it in experts’ hyper focus on Nasdaq returns—with some invoking comparisons to the early 2000s’ Tech bubble—as well as the many anecdotes of venture capital (VC) funding drying up—hinting at a potential new dark age for Silicon Valley startups.

Beyond stocks, some economists worry the economy is moving to an era of permanently higher inflation, reversing the trend from the past four decades. Those elevated prices are, in turn, allegedly forever altering consumer spending patterns, with higher prices driving people to favor cheaper goods over more expensive experimental products—a trend they argue would stifle innovation. Elsewhere, others fear two of the biggest stories over the past two years—COVID and supply chain issues—are permanently changing the global economy’s structure. Some speculate COVID has forever rewired labor markets, while others posit today’s global supply chain system is untenable, so the future is regional networks—thereby spelling the end of globalization. 

But be careful with forever change projections, as extrapolating the present far into the future is textbook recency bias—a mistake for investors, in our view. Recent developments may appear to be the beginning of long-lasting trends, but history is littered with examples of purported paradigm shifts that fizzled. Cryptocurrencies have been discussed as the future of money for years, yet they have shown scant evidence of possessing the necessary qualities of money—i.e., having a stable, predictable value—given their extreme volatility. (Even so-called “stablecoins” aren’t looking so stable right now.)

Or go back to the throes of the pandemic, when some experts warned “the world may never recover its thirst for oil,” arguing global oil demand may never regain its 2019 record high.^[i] Two years later, demand surged back—and shows no signs of abating, notwithstanding the temporary hit from China’s latest lockdowns. Or what about all those workers forced into premature retirement because of COVID, thereby forever modifying the US labor market? A recent analysis shows some 1.5 million retirees have reentered the labor market over the past year.^[ii] Reasons vary, from financial necessity to personal choice, but that forever change wasn’t.

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, as they both reflect and impact investors’ feelings. 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. The former were the future of money and going to forever change the modern financial system while the latter were supposed to be the next big thing in art in our increasingly digitized world. In 2000, plenty of headlines heralded the “New Economy” of the 21^st century, one in which “boom-and-bust” was extinct—and Internet companies would lead the way into this brave new world. In both cases, these wildly optimistic projections preceded tough times for the relevant securities.

On the unwarranted pessimism side, see 2020, when the pandemic purportedly ushered in a permanent new normal. 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” 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.^[iii] That, combined with governments’ push to transition to “low-carbon” economies, had many experts 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.

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 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. 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.