Seek more context when you hear these popular words and phrases about markets

A version of this article was originally published on TKer.co.

Words and phrases can help us communicate with each other quickly and efficiently.

But for some important matters, a single word or phrase can be a little too imprecise and ambiguous, leading some to make incorrect assumptions about what’s being said.

This can be a big problem when discussing the markets and the economy, where language sometimes has multiple meanings.

There’s also the fact that people often leave out the time frame when they’re talking about markets, which is why short-term traders and long-term investors often sound in conflict when they might actually agree.

Let’s discuss some of these words and phrases.

“The economy”

Some people say the economy is doing well. Some say it’s doing poorly.

But what economy are they talking about?

There’s the economy as measured by gross domestic product (GDP), which aggregates a bunch of financial measures of activity, like personal consumption, investment, government spending, and international trade.

There’s also the National Bureau of Economic Research’s (NBER) definition, which includes non-financial metrics like employment gains.

Some say the economy goes into recession when GDP growth is negative for two consecutive quarters. But officially, it’s not a recession until the NBER determines we’ve had a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Many people will tell you neither of those definitions is sufficient. Just because you have a job and you’re buying stuff doesn’t mean you feel particularly good about the economy. Maybe you hate your job more than ever. Or despite all your spending, maybe you’re actually falling short of your hopes and dreams. Surveys of confidence and sentiment show people feel unusually crummy about their present situation and prospects despite GDP at record highs and unemployment at historic lows.

And then there’s the stock market, which appears to reflect ebullience, with prices near all-time highs. That’s because stocks are driven by corporate earnings, which is to say the economy matters to the stock market to the extent it’s fueling earnings growth. The stock market doesn’t care how poorly you feel about the economy as long as profits are going up.

Also, don’t get me started on how politicians will spin the definition of the economy in ways to confirm their biased narratives.

“Bullish” and “bearish”

To be bullish means you think a stock or the stock market is going up. To be bearish means the opposite.

For most of my life, I didn’t think too much more than that.

That was until November 2021, when Morgan Stanley strategists published a 12-month target for the S&P 500 that implied a 6% decline. It was the call that prompted financial media to label Morgan Stanley strategist Mike Wilson a market bear. And to his credit, he got the market’s direction right.

But is expecting a 6% decline within a year really bearish?

Since 1980, the S&P 500 has seen an average intra-year max drawdown of 14%, and in most of those years the market closed higher.

In down years, the S&P 500 fell by an average of 13%.

For you statistics nerds, a 6% decline is within one standard deviation of the market’s average annual return.

So if you’re a long-term investor like me — someone who expects volatility in the short-term — then an occasional 6% decline is arguably bullish since sharper declines would still be within the boundaries of what’s historically normal.

Now if you were expecting the market to be 6% lower five or 10 years from now, that would be a different, arguably more bearish story. History says the probability of positive returns is considerably higher as you extend the time horizon.

While I used to think ‘bullish’ and ‘bearish’ were simple adjectives, I increasingly view these terms as relative to the individual, especially over the long term.

If someone tells you they’re bearish and their opinion matters to you, then you should also find out how much they expect prices to fall and over what time horizon.

If this bearish person tells you they expect the decline to occur within a year, ask them where they think prices are headed in the following year or over the next several years. Sometimes they’ll surprise you with an unexpectedly bullish response.

“Bubble”

In my experience, no two people define bubbles precisely the same way.

However, everyone at least agrees that bubbles involve asset prices rising far past what most would argue is justifiable — before falling sharply.

With that in mind, let’s say we’re in a bubble. What are we to do with that information?

When some market pundits warn we’re in a market bubble, they’re trying to tell you that you shouldn’t have money in the market because they think you’re at risk of losing money.

But many other experts will stop short of suggesting that money invested now is doomed to turn into losses. Because it’s possible that prices go much higher, and when they eventually fall, they settle at a level that’s higher than where we are today.

Consider when then Fed Chair Alan Greenspan uttered the phrase “irrational exuberance” in December 1996, when the S&P 500 was at 749. While he wasn’t explicitly warning the market was in a bubble, he was at least suggesting that there were signs the market was overextended. And history credits him for predicting the dotcom bubble that eventually burst.

Here’s the issue: After the dotcom bubble popped, the S&P 500 bottomed in 2002 at 776. That’s right. The S&P’s post-bubble low was actually higher than where it was when Greenspan gave his speech.

So if someone tells you we’re in a bubble, you should at least ask if they think the market will be lower than where it is today once the dust settles.

“Beat expectations” or “miss expectations”

After every earnings announcement and every economic data release, one of the first things you hear is whether the report beat or missed expectations.

Specifically, it’s in reference to some average estimate calculated by surveying analysts or economists who provide forecasts for those reports.

The implication is that if the report beats estimates, it’s good. If it misses, it’s bad.

However, there are all sorts of problems with this.

For starters, you could argue it’s not the report that beat or missed estimates. Rather, it was the analysts or economists who got it wrong.

But even if the reported results and estimates were bang in line with each other, you still lack critical information. Did the metric grow or decline? Did growth accelerate or decelerate? Did profits flip to losses?

There are also scenarios where a company can report accelerating growth that exceeds management’s own targets but “miss” some analyst’s forecast. Who exactly failed here?

By the way, most large publicly traded companies have historically “beat” quarterly expectations. That is to say that “better-than-expected” is arguably expected. I mean, what are we even talking about at this point?

Most companies “beat” expectations for quarterly earnings. (Deutsche Bank via TKer)

“This time is different” or “unprecedented”

In our efforts to understand what could happen in the future, investors, analysts, and lowly newsletter writers like me draw from history.

The past is rich with analogs that often repeat to some degree.

However, in markets, we all understand that we’ll never relive all of the exact conditions of past episodes. And so there’ll always be some uncertainty when we draw from the lessons of the past.

But every once in a while, we’ll hear a market prognosticator lead their counterargument to a historical pattern by asserting, “THIS TIME IS DIFFERENT.”

Sometimes that person will provide the compelling evidence to argue their point, which is what you hope for in any argument.

But sometimes, you’ll hear people throw around language like “this time is different” and “unprecedented” like it’s some sort of rhetorical trump card that lazily invalidates any argument that draws from history.

The fact of the matter is this time is always different. We are by definition always living in unprecedented times.

And so this language is mostly meaningless unless you can back it with evidence about what often happens when certain conditions are met — and why it won’t happen this time around.

The big picture

When we’re talking about inconsequential things, words and phrases can serve as a great shorthand to explain things ambiguously.

I like food. I’m optimistic about his health prognosis. Your sister was prettier than I expected.

But if an ambiguous statement could inform something serious like an investment decision, you should always seek more context.

A version of this article was originally published on TKer.co.