The newly released quarterly consensus forecast of 60 leading economists by The Wall Street Journal brightened from three months ago. As always happens when a bull market begins, what most people expect -- the consensus forecast -- is wrong. Bull markets always climb a wall of worry. They happen in plain sight and defy forecasts. It’s as confounding as it is paradoxical.
The Wall Of Worry. Two historically reliable indicators of a recession are flashing red: The U.S. Index of Leading Economic Indicators plunged for the past 14 months in a row, and the yield curve inverted in December 2022 and has remained lower than any time in over four decades. In addition, consumer sentiment, according to the latest University of Michigan monthly survey, never recovered after the pandemic and remains about as low as during the 2008 mortgage-debt crisis and recession. That’s a wall of worry.
The Climb. In April, the consensus forecast called for a mild contraction in the third quarter of 2023, with slight growth in the fourth quarter of 2023 and the first quarter of 2024. The new WSJ consensus forecast, based on a poll conducted in early July, forecasted a 1.5% growth rate, up from the economists’ expected growth rate of six-tenths of 1% in early April.
Another significant revision upward: Three months ago, the economists expected a contraction of a quarter of 1% in the third quarter of 2023, compared to the early-July forecast for a 3Q ‘23 growth rate of six-tenths of 1%. In addition, the consensus forecast of the economists polled by WSJ in early July pushed back when a contraction would occur, from the third quarter to the fourth quarter of 2023, and the negative growth was cut from six-tenths of 1% to a mere one-tenth of 1%.
Goldilocks Metaphor Invoked. Independent economist Fritz Meyer on Tuesday, July 18, in a class for financial professionals, invoked the Goldilocks metaphor to describe current economic conditions. It was the first time since October 2014 he invoked the metaphor. The last time he used this metaphor, the economy expanded, and the stock market appreciated for more than six years until the pandemic hit in February 2020. Twelve-month forward-looking Standard & Poor’s 500 index earnings estimates bottomed out earlier this year and expected earnings have risen in recent months. With no recession ahead, the surprising economic growth is poised to power the earnings growth trend higher in 2024 with surprising strength.
Of course, things could change in a snap. Black swan events, like the pandemic, geopolitics, war, and other bad unforeseen crises could delay or derail economic progress. But barring something like that, the new bull market could be under way right in front of us right now.
The suddenly brighter consensus forecast of economists reflects how wrong the consensus has been in recent months. Rarely has the consensus been so wrong for so long. That’s a bullish signal.