personal finance

Stock analysts: bull-baiting


“When every instinct you have is wrong, then the opposite would have to be right.” That was Jerry Seinfeld’s advice to perennial loser George Costanza in the eponymous sitcom.

Brokers are the George Costanzas of the markets. That is the implication of peaks in buy recommendations that appear to anticipate or coincide with stock market collapses.

Ominously, the bulls are back. Despite the S&P 500 moving further into negative territory over the past six months, bullish sentiment remains at levels not seen since 2011. Over 70 per cent of S&P 500 stocks currently carry a consensus buy, or strong buy rating. And only one carries a sell, Campbell Soup.

Just before the 2008 crash, Wall Street analysts were screaming “buy”. At the March 2009 low they were screaming “sell”. Going against this consensus view would, as the chart shows, have saved or made you a lot of money over the next six months.

Analysts (and investment writers) are prone to cognitive biases. Focusing on individual companies means you may fail to see the big picture. Comparing findings with a close-knit peer group fosters groupthink. “Sell side” analysts are there to do exactly that, sell stock.

Moreover, buy recommendations tend to be right more often than sell notes, because bull markets last longer than bear phases.

That will not protect brokers from criticism if markets are heading into an extended downturn. This seems probable, both for cyclical economic reasons and secular political factors. The swath of buy notes would then justify Woody Allen’s description of a stockbroker as “someone who invests other people’s money until it is all gone”.

The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below



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