High profile bears argue their case with weak evidence and manipulated data
Bearish equity strategists are taking the art of persuasion to another level. Unfortunately, it’s a level with way lower standards.
Bears keep warning that stocks are still overpriced. Most of them back their reasons with valuation measures, e.g., PE ratios, or historic analogs like “stocks tend to bottom six months before recessions start”. You might not agree with subjective evidence, or believe that history must repeat itself, but at least their proof backs their case.
But some widely followed bears are putting a negative spin on ambiguous evidence, and even manipulating data.
Sofi, Liz Young
Morgan Stanley, Mike Wilson
Worth Charting, Carter Worth
1) Sofi:
On Feb. 21, 2023, Sofi warned that stocks were too risky. Why? Because the S&P 500’s equity risk premium sank to its mid-2007 low, i.e., the benchmark’s infamous Great Financial Crisis top.
But realize this. Sofi left out one key fact- against the same ERP backdrop, stocks have ripped.
Check out the image below. I extended Sofi’s blue line with a red extension, and I overlayed the S&P 500.
Sure, when the ERP was at its current level back in 2007, the S&P crashed. But check out the periods between 1987-1995 and 2002-2006. Even though the ERP frequently traded at Sofi’s highlighted mid-2007 level, investors pushed stocks higher.
If the S&P 500 could climb back then, it can surely rally now.
2) Morgan Stanley:
On February 20, 2023, MS issued its “death zone” report. Morgan warned that stocks were doomed because the Equity Risk Premium sank into a “death zone”. The firm provided this evidence:
Morgan Stanley’s Death Zone chart, Feb. 20, 2023
But the evidence is weak. Here’s why.
ERP seems to be a moving target: The inputs that drive Morgan Stanley’s ERP indicator clearly shift over time. Look for yourself. The peaks vary; and over time, the troughs reset lower.
Stocks did great at prior High Risk Zones: On the chart below I placed the S&P 500 over Morgan Stanley’s evidence. Historic High Risk Zones wound up marking great buying opportunities in: mid-2009, early 2010, early 2018, late 2018, and early 2021. If the SPX regained traction then, why can’t it stabilize and improve now?
Jim’s Death Zone argument, Mar. 9, 2023
3) Worth Charting
This bear went on prime time business TV and said that the S&P 500 will sink to 3,000. He showed this evidence- the S&P 500 and seemingly perfect lines.
Worth Charting’s Logarithmic S&P 500 chart, 3/1/23
But here’s the problem. He manipulated the chart.
In the above chart, he made the lines neatly fit his narrative by switching the S&P 500’s price scale. from arithmetic to logarithmic.
Now, look what happens when I move the scale back to how most people and business news outlets plot the market, arithmetic. Poof! The evidence falls apart. The lower line sits nowhere near SPX 3,000 and the seemingly perfect trend channel disappears.
Jim’s S&P 500 chart showing change to arithmetic price scale
My Advice
Your portfolios will suffer if you don’t scrutinize your research services strategist ideas.
I’ve developed a way to monitor them. And I’m free to question anyone or any firm.
I’ve been spending years listening to these people, and they do have value, but not if you take them at face value. You have to listen in a certain way; then you can think ahead of strategists, and position ahead of other portfolio managers.
I can help you and your investing team think differently, and properly vet your existing equity research providers.
Let’s talk. Just reach out to jim@mashupmkt.com
Good luck, Jim
