In search of the 'unknown unknowns'
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Tuesday, December 7, 2021
Never let a bull market lull you into complacency
“There are known knowns — there are things we know we know. We also know there are known unknowns — that is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.”
~ Donald Rumsfeld
The sage if not convoluted soundbite, uttered in 2002 by the recently deceased former U.S. Defense Secretary on the cusp of the Iraq War, occurred to me as I sifted through the detritus of my email inbox on Monday morning — filled as it was with reminders of a volatile week.
For those just catching up, the Omicron variant is menacing investors (though you couldn’t tell, judging by Monday’s price action), a suddenly inflation-centric Federal Reserve is spooking cryptocurrencies ... but the U.S. economy is chugging along just fine, thank you very much.
“Omicron has put quite the wrinkle in the recent bull market, but stocks are still up more than 20% for the year, so it is good to put things in perspective,” noted Ryan Detrick, chief market strategist at LPL Financial.
“After more than a 110% rally from the March 2020 lows, perhaps investors needed a reminder that stocks can’t go up forever and that while volatility might be frustrating, it is perfectly normal,” he added.
Taking the time to digest an event-filled few days, two critical data points gave the Morning Brief an opportunity to invoke Rumsfeld’s memorable line about trying to war game for the unexpected.
After a brief slowdown in the third quarter, Wall Street economists are getting bullish about the current quarter and beyond — provided inflation and the Fed’s plans for monetary policy don’t completely derail investors’ best laid plans.
IHS Markit’s Joel Prakken and Chris Varvares expect that Q4 growth will spike above 7%, “driven by a rebound in vehicle production and unexpected strength in exports and inventory investment. The transition from COVID pandemic to endemic, gradual resolution of supply disruptions and labor shortages, and still accommodative financial conditions will support continued expansion into 2022 even as pandemic-era fiscal support wanes.”
And over at JPMorgan Chase, investment models “continue to see very little risk of recession beginning within the next 12 months given the generally rapid pace of improvement in the economy.”
The banking giant added that through November, “our model placed essentially zero probability on a recession occurring in the next 12 months [emphasis mine]. In the untruncated version of the model that we track as a tool for interpreting the data flow, there was very little deterioration or improvement in November, except for occasional ups and downs.”
