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Wall Street is sometimes right when it is wrong: Morning Brief

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On October 23, the yield on ten-year government bonds rose above 5% for the first time since 2007.

On October 27, the S&P 500 entered a correction.

Last Monday, one of Wall Street’s biggest bulls lowered his outlook for the index.

The next day, the S&P 500 ended its third straight losing month.

In recent days, most of these developments have reversed.

On Friday, the S&P 500 completed its biggest weekly rally in a year, with the benchmark index rising nearly 6%. The 10-year yield, boosted by comments from Fed Chairman Jerome Powell on Wednesday and Friday in the soft October jobs report, rose roughly 40 basis points to near 4.55%, the biggest weekly gain since March.

Technology and small caps led stock prices higher, with the Russell 2000 rising last week by the most since February 2021. Bitcoin hit its highest level since May 2022.

Taken together, this market action evokes one of the defining statements of the economic moment: We’ll be right back.

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But in the wake of these sharp turns in the equity and fixed income markets, some in the investment world are left with a newly revised outlook that doesn’t look exactly prescient: Stock bulls turn cautious on the lows, strategists call for a 5.5% return on the 10-year term, simultaneously with a return of 4.5%. More pox in a company that just doesn’t seem to be doing well.

On the other hand, this week’s market action and each of these reversals also served as a powerful example of the timeless lesson in investor psychology embedded in one of Warren Buffett’s most famous quotes: “Be fearful when others are greedy, and be greedy when others are afraid. “

Moreover, we would say that this week is less an example of the folly of predictions and more an example of what analysts and strategists are. Real to offer investors: a prompt.

Because the audience for investment strategists isn’t really an investing audience looking for ideas or action plans. Rather, it is a professional investment community that already has them.

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Financial advisors, hedge fund traders and mutual fund managers all have mandates to adhere to, client money comes and goes and strategies are already having an effect.

NEW YORK, NEW YORK - NOVEMBER 03: Traders work on the floor of the New York Stock Exchange during afternoon trading on November 3, 2023 in New York City.  All three major indexes are on track to advance and close Thursday's high and are on track to have their best week of 2023 amid the release of a jobs report from the Bureau of Labor Statistics.  (Photo by Michael M. Santiago/Getty Images)

Traders work on the floor of the New York Stock Exchange during afternoon trading on November 3, 2023 in New York City. (Photo by Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)

Their peers who are charged with providing recommendations to buy, sell or hold different stocks, themes, sectors or asset classes offer no incentive to do as much. Rather, these opinions and forecasts are starting points from which managers can consider whether the relative weights of their portfolio are appropriately calibrated.

A new recommendation to buy a particular consumer name could perhaps lead a portfolio manager to examine his own exposure to the sector, or perhaps do his own homework to model that company. And some investors shall buying or selling something based on an analyst’s opinion. But in the highly regulated world of investment management, these decisions are always a warning sign.

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In an interview with The Wall Street Journal last week, Berkshire Hathaway vice chairman Charlie Munger said: “I think fewer and fewer people are really needed in stock selection. Usually it’s charlatanism to charge 3 percentage points a year or something like that to manage someone.” other people’s money.”

Research shows that if you actually have to pay 3% per year to manage your money, you are probably being ripped off. But part of Munger’s criticism is based on reading Wall Street’s daily firehose of opinions and warnings that are more prescriptive in theory than in practice.

Yesterday’s Hollywood image of stockbrokers cold-calling doctors to pitch stocks has been replaced by a room of ongoing sensitivity analysis from CFA on how portfolio betas change after adding 75 basis points of exposure to cyclical stocks across three strategies.

No matter how you make your living, no one wants to be wrong, and no one likes it when they are. But sometimes on Wall Street you have the right to be wrong.

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