Downgrade This

Mike Zaccardi

THE RESEARCH TEAM at Bank of America put out a pair of seemingly contradictory investment notes last week. On the bullish side, the folks there pointed to extremely cheap valuations in the small-cap space. But a few days later, the economics department rocked Wall Street with a bearish forecast calling for five consecutive quarters of negative real U.S. GDP growth.

I chuckled at the sequencing: It’s often said the stock market leads the economy by about six months, give or take. Perhaps that’s no better seen than in these two research pieces. Consider that stocks—big and small, domestic and foreign—are all down bigtime so far in 2022, and yet it’s only now that we begin to hear economic downgrades from Wall Street research outfits, along with analysts lowering their year-end stock price targets.

Rarely is it the case that the professional analysts at large research firms accurately get ahead of major market moves. To me, these pessimistic outlooks should make investors more sanguine about stocks. Maybe downbeat prognostications from the pros are just what’s needed to set up the next bull market. We already see incredibly sour sentiment from investors, corporate executives, small business owners and consumers. Low valuations, analyst downgrades and general despondency are characteristics of buying opportunities, not a time to hide out in cash.

It’s hard not to be upbeat about the future—assuming you have a time horizon that stretches beyond the next few months. History tells us that returns are, on average, robust after a dismal six-month stretch like we’ve just endured, according to data gathered by Charlie Bilello. While everyone else shudders when they peek at their account balances, now might be the time to ramp up your monthly contributions to your low-cost stock index funds.

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