Confimation Bias

Confirmation Bias Everywhere…Am I Right or What?

David B. Armstrong, CFA Weekly Market Commentary

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The S&P 500 is back to being nearly flat for the year.  It feels worse than that, but it’s where we are.  The S&P 500 rose to a record high of 2,873 on January 26th, which was a +7.5% gain for the calendar year.  That makes the S&P 500 flat with about December 22nd…which was right when the Tax Cut and Jobs Act (TCJA) was passed.

So basically all the gains the TCJA provided for the earnings outlook have been offset by the early February sell-off when investors feared higher wage inflation and the possibility that the Fed would raise interest rates more aggressively.

Now, it’s fears of protectionism.

According to this weekend’s research report from Bespoke, “since 1/26 when the S&P 500 last closed at an all-time high, there have been 16 days out of 25 where the index saw a daily move of more than 1%. That’s twice as many 1% moves as we saw in all of 2017! Similarly, the S&P 500’s average daily move since the high on 1/26 has been +/-1.2%. In 2017, the S&P 500’s average daily move was a quarter of that just +/-0.3%.”

I think last week was another emotional sell-off.  These occur because traders and short-term investors agonize that some new event is going to cause a recession.  This sends prices down even though earnings remain solid.

Then once those traders and short-term investors realize that the event will not cause a recession, a rally ensues.

One day there will be a valid event that will correctly anticipate a recession and a bear market, but that will more than likely come as earnings are dropping.

But for now – earnings are GREAT.  Earnings season wrapped up about a week ago with Wal-Mart’s report.  Remember, companies are reporting earnings all the time, so in order to have a start and finish to compare quarters, Alcoa earnings report start the quarterly season and Wal-Mart ends it.

As you can see below, the beat rates for both earnings (the “bottom line”) and revenues (the “top-line”) were very strong. According to Bespoke, “the percentage of companies that beat EPS estimates came in at 69%, which was the highest reading since Q3 2006 and the sixth highest reading over the last 20 years. The percentage of companies that beat revenue estimates came in at 73.2%, which was the highest reading since Q4 2004 and the fourth highest over the last 20 years.”

Don’t poo-poo this – it’s a big deal because one thing that makes this season’s high beat rates even more impressive is the fact that analysts were hiking their estimates coming into the season at their fastest pace in more than ten years.

On top of earnings, let’s also consider all the good news about the US economy:

  1. The labor market is tight.
  2. Consumer confidence is optimistic. See Bespoke’s chart below.

  3. Manufacturing is booming. On March 1st, February’s Manufacturing PMI was reported showing a gain to 60.8, the best reading since May of 2004. More from Bespoke, below.
  4. GDP growth is solid.  On March 1st, the Atlanta Fed’s model estimate for real GDP growth for the first quarter of 2018 was increased to 3.5%, up from 2.6% on February 27th.
  5. Global trade is roaring. President Trump will most likely face powerful forces challenging his recent protectionist thrusts.

Be careful of one thing right now as it relates to politics…it’s called confirmation bias.  It’s the tendency to say, “I told you so, Trump is nuts and since I’m right about that, I’m right that the world is coming to an end and another 2008 is right around the corner.”

It’s dangerous for your portfolio. I know March 9th, 2009 seems like yesterday to many, but the bull market turns nine years old on March 9th, 2018. Wow…This is now the second largest and second longest bull market since World War II with only the 1990’s bull market holding first place.

That seems to scare a lot of people, especially now with the recent talk of tariffs, higher interest rates, rising wages and increasing inflation.  But remember the saying, “Bull markets don’t die of old age, they die of excesses.”

I don’t currently see the kinds of excesses I’ve seen in the past two recessions.

It’s been a while since I’ve written about the things we watch for that signal excess, but they are overspending, overborrowing, and overconfidence…and I don’t see signs of any of these things right now.

Everyone’s worst nightmare is another 2008. I get that.  But that can’t keep long-term investors out of the market right now because the odds of a 2008 are low.  It’s like saying you don’t want to fly because you are scared of being in a plane crash, but you are willing to drive to work 75 MPH next to other people texting, driving every day feeling immortal.

The real risk to your portfolio is inflation – that’s why you need to be invested.  Being invested with a long-term plan and an asset allocation that retains enough cash to weather a storm is the best way to ensure your portfolio is not eroded by inflation.

If you are an investor who feels like the recent downturn has you questioning your willingness to take risk or stay invested, let us know. We have fun online risk tests that we’re happy to send you as a first step. You can email our Team at and we’ll set one up for you.

Keep looking forward – Dave


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About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Along with his role as the firm’s chief investment strategist and portfolio manager, Armstrong is viewed as an industry leader in several areas including innovative practice management, discretionary asset management, digital marketing and social media. Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary, and is frequently sought after by journalists and event coordinators. Visit his full biography here.

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