Juggling Dynamite

A paper from the Swiss Finance Institute‘s working paper series tracked data from more than 29,000 finfluencers on financial social media site StockTwits and came to some predictable conclusions. Those with the least skill tend to be the most followed. The democratization of finance? Not so much; see, Investors flock to loudest, least skilled voices on social media, finds research:

“Social media has gained great importance in recent years for sharing and acquiring information,” the paper stated.

“An important question is whether competition among users of social media platforms is such that followers can easily identify skilled […] finfluencers and drive out unskilled finfluencers from the market for social information. We find that the answer is no.”

The researchers — from the University of California, Berkeley, Rice University and the University of Lausanne — found that finfluencers who provided the worst advice were the most active and had the greatest following.

…skill was “effectively ignored” when it came to influence. Skilled finfluencers were less active and also tended to take more negative positions. The anti-skilled most often created overly optimistic beliefs.

“Surprisingly, unskilled and anti-skilled finfluencers have more followers, more activity, and more influence on retail trading than skilled finfluencers,” the paper said.

Now add that even those with the education and experience to be actual experts most often work for firms that sell long-always investment products and portfolios. Hence, why so few offer valuable financial insight and management services. And the few who do tend not to attract the masses. Word.

Eyes on the recessionary bear prize. Valuable investment opportunities are in the making.

Peter Boockvar, Bleakley Financial Group CIO, joins ‘Squawk Box’ to discuss the results from the Fed’s quarterly Senior Loan Officer Opinion Survey, and why a recession is likely unavoidable. Here is a direct video link.

The chart below shows the Senior Loan Officers Survey (willingness t0 lend to consumers in dark blue) versus US nonfarm payrolls (light blue) and recessions (in pink) since 1970.

Next, we see that the ISM purchasing manager’s index (in yellow below since 1999 courtesy of ISABELNET.com) is leading corporate earnings (blue below) lower over at least the next 6 months.

The NFIB Small Business Confidence Index now lower than during the pandemic shutdown, is at levels seen during past recessions (below since 1974 via Lance Roberts).

Lastly, we have the allocation to equities in retail portfolios (below since 2005 ). Down from the peak in 2022, but at 60%, still well above the 40% range typical of bear market bottoms. Most are still heavily risk-exposed, heading into a recessionary bear market. This is goin’ leave a mark for years to come.

Three-quarters of NASDAQ companies have reported Q1 2023 earnings thus far, and the aggregate year-over-year EPS decline is 10.2%. After rebounding 17% year to date, the NASDAQ remains -23.4% from its peak in November 2021, and the average individual brokerage portfolio is down 27% over the same 17 months.

Canada’s S&P/TSX Composite is expected to report a year-over-year earnings decline of -16.4% in the first quarter with -10.2% and -2.9% for Q2 2023 and Q3 2023, and +7.6% for Q4 2023, making for the full year 2023 earnings of -5.3% (FACTSET data). At the same time, the TSX index has bounced 6.4% year-t0-date, now just 7.2% below its March 2022 top.

S&P 500 earnings have contracted 2.2% in the first quarter, but the consensus expects a rebound in the second half, making 2023 EPS a positive 2%. Led by a record 14% concentration in the two most expensive companies (Apple and Microsoft), the S&P has bounced 7.7% year to date and remains -13% since its December 2021 peak.

Historically reliable leading and coincident economic indicators suggest a recession is unfolding in 2023. The average peak-to-trough S&P 500 earnings decline during past recessions has been 20%+.

The current Shiller 10-year cyclically adjusted Price to Earnings ratio for the S&P 500 is 28.9 x (from 33.89 x one year ago) and compares to a long-term average of 17 and significantly below that average at past bear market bottoms.

The table below (courtesy of A.Gary Shilling’s May 2023 Insight) shows the actual peak-to-trough price decline for all equity sectors during past recessions (1990, 2000-02, 2007-09 and 2020), as well as the average loss over all four (5th column).

The final column shows the price change over this cycle to date and suggests much downside is yet to come. This all aligns with past recessionary bear markets where the lion’s share of equity losses happened during the months after the Fed paused tightening efforts and returned to easing.

Bear markets have a psychologically challenging ebb and flow that suckers the cyclically uninformed all the way down. It pays to be big-picture aware and disciplined.