Goldilocks’ porridge is getting cold again – and the bears are already sniffing their way back to the house.
With late August’s economic reports showing the US is growing steadily stronger, talk of a “Goldilocks economy” emerged earlier this month. The decades-old catchphrase sets an ideal for growth that’s “not too hot, not too cold…just right” in order to keep the bears at bay.
But in the weeks since, the positive sentiment once again appears to have been dismissed as so much fairy-tale bunkum. Stocks have languished this month after the S&P 500 closed in the red for August, its worst month since February.
Why have the bears returned so quickly? It’s partly a question of market psychology. Let me explain.
In 1992, Salomon Brothers’ analyst David Shulman legendarily dubbed “Goldilocks” an economy growing 4% annualized with 3.2% year-over-year inflation. We’re not quite there. But it’s more Goldilocks-like than has been widely fathomed.
Recall how at the start of the year dire bearishness, with expectations of a recession, was in vogue. Since spring 2022, bears swore Fed hikes, with a list of other worries – Ukraine and Silicon Valley Bank among them – would kneecap GDP which they believed necessary to slow inflation.
Fed Chairman Jerome Powell, meanwhile, has long warned that rate hikes meant “economic pain”– claiming “sticky” inflation required higher unemployment rates — and likely recession.
Yet inflation fell pretty steadily from June 2022’s 9.1% year-over-year high to 3.2% in July. And all that economic “pain”? GDP’s 2.5% growth exceeds virtually all expectations, job growth is steady, unemployment down, labor participation rate up. All good.
Regular readers know I’ve pretty much been saying this all along: no recession, modest but increasing growth, inflation normalizing, strong stock market. Pretty Goldilocks-like. And quietly but indisputably, the stock market has been loving it – despite the bears’ continued huffing and puffing.
Now, however, the fact that our economy – if only briefly – has been once again dubbed “Goldilocks” ushers in a new psychological phase of this 11-month-old bull market. (Spoiler alert: it could get slightly bumpy for a bit, but hang on.)
Here is the problem: When humans are wrong for such a long period of time, they lack conviction after initially entertaining an updated set of ideas. It becomes easy to re-jolt them to disbelief and panic.
This is the Wall of Worry I described in my March 5 column on what I like to call the “Pessimism of Disbelief.” Behavioralists would say such folks seek to “shun regret”— to justify not having been actually wrong. So even a whiff of risk will bring back the prior negativity. Sentiment vacillates.
Mostly the negativity is hyperbole – multiple bouts of hand-wringing for every actual market break of short-term, downside volatility. This phase of any young bull market often has one or two short-term “breaks” per year – and they can slam stocks by as much as 10% to 20%. But it is also common for no big downside volatility.
The upshot? On the positive side, the fact that Goldilocks showed up at the house at all showed that people can envision a better future. But brace yourself for a few more ups and downs while Goldilocks gets chased around the cottage by the bears.
How will the story end? Rather than getting too wrapped up in it, I’d advise you to stay put and keep eating your own porridge.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 17 countries globally.