90% of CEOs were wrong — there wasn’t a recession coming next

Summary: A year ago most CEOs thought there was going to be a recession next. They were wrong, and it tells us something about how unscientific financial prediction is, and why you shouldn’t trust most of the “experts”.

Artist: Jeff Axup “The Sky Is Burning”, DALL-E on pixels

In late 2022 and early 2023 nearly everyone was on the “recession is coming” bandwagon. In particular, 90% of CEOs believed this, and responded by conducting mass lay-offs of their best and brightest (and highest-paid) to make their companies “more lean and resilient against the dark times ahead.” Around the same time, Elon Musk sold Tesla shares when they were significantly down to have emergency funds available — waiting a year would have given him a 150% gain on those stocks, and now he says he doesn’t own enough of the company. In Aug 2023 Michael Burry had shorted the entire SP500, expecting an imminent crash. It appears he lost a lot of money. As late as Sept 2023 JPMorgan was still saying a “recession is more likely than not” — and they weren’t the only ones.

However, the recession is still missing in action, and today the SP500 returned back to its all time record high. This means that anyone who was unlucky enough to invest at the previous peak, would have been able to exit today with zero money lost. It also invalidates the prediction that “there is a recession coming next.” Furthermore, it means that the companies preparing for “hard times” should have instead been laying the groundwork to take advantage of the great times ahead.

Timeline of actual SP500 data vs public opinion and behavior.

On Feb 6, 2023 I wrote an article stating that the recession had already occurred, and predicted a rebound to previous market highs by the end of August 2023. That prediction turned out to be both correct (the market was going up, not down) and slightly wrong (it took 5 months longer than expected). Here is what we can learn from this mass delusion by both industry leaders and many of our leading financial advisors, which is currently being “conveniently forgotten” as usual.

Take-aways

• Our leaders are sheeple too and they get scared like everyone else
  All it takes is a few scared CEOs who have over-extended themselves, and a TV news anchors looking for the next disaster to report in the “breaking news” section, and couple of influencers looking for ad impressions saying “Could we be in for a recession?”. CEOs and trade fund managers have the same trait: If they all jump on the bandwagon, and when the wagon goes off a cliff, they can easily spread the blame afterwards. It is a rare person who will stand up from the crowd and take their own path. Oddly we would expect CEOs to be just that type of people, but clearly they don’t have enough background on the economy to have any vision in this domain.
• CEOs are subject to peer pressure and love excuses for difficult actions
  Humans are pack animals, and CEOs aren’t excluded. This means that if they see the other alpha dogs leaning in a direction, they are prone to lean there as well, regardless of whether it results in the boat capsizing. CEOs also don’t like firing people. It produces a lot of animosity, shows that hiring mistakes might have been made, causes company health to be questioned, and has associated legal risk. “Layoffs” are just an excuse term that C-level executives have created for themselves to justify firing people that “didn’t fit in” with the tribal conventions of the company, or to make large-scale course adjustments. CEOs love to have a large storm visible on the horizon. Then they have a justification to choose a new destination for the boat, while quietly throwing some of the extra weight overboard. If there isn’t an actual storm there, they may be able to convince people there is.
• When CEOs should do layoffs
  Recessions happen roughly every 6 years. If a CEO claims they are doing layoffs “due to the coming recession” it means they didn’t have a 6-year plan. It means they didn’t manage hiring competently. It means that they don’t have a system for redistributing talent to where it is most needed within their organizations on a yearly basis. Additionally, if companies decide they need to “tighten their belt” it should happen due to changing markets and competition, not “mirage recessions”. The people affected by layoffs should be in the positions that are most easily automated, or where the added bureaucracy is keeping the company from executing rapidly. Senior positions with people who have an intimate knowledge of the industry and products should be the last people to leave. Their higher salaries are often demonstrators of their worth to the company. Companies choosing to do layoffs hobble themselves (both financially with severance packages and intellectually) while giving advantages to their competitors who have better planning and foresight. “Pausing hiring” can make sense, while layoffs typically show poor leadership.

The NBER is very picky: Note the missing red ‘recession’ in 2022.

• The NBER is very picky
  The most commonly accepted definition of a recession is “two consecutive quarters of negative GDP growth.” However, the NBER doesn’t accept that. In their own words, “We treat the three criteria — depth, diffusion, and duration — as somewhat interchangeable. That is, while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.” So in early 2020 the NBER called a brief 2 month recession (after 2 quarters of negative GDP growth), but in early 2022 (after 2 quarters of negative GDP growth) they chose not to call one. This makes the term “recession” (in the US) highly subjective and somewhat unreliable. Thus it is better to focus on “periods of negative GDP growth” as a predictor, rather that formal recessions.
• Some people make money when other people fear a recession
  This deserves further exploration, but it pays to follow the money. For example, before Robinhood, stockbrokers made stock trades for you, and they made a commission on every trade. Thus, they had a financial incentive for you to trade, regardless of whether it was buy or sell, or whether the trade made sense or not. The more afraid or greedy you are, and the more you second-guess yourself, the more money they made. Similarly there are many different industries that make money when a recession (or the expectation of it) is looming. One might expect funds investing in gold or bonds, traditional hedge funds, or money-market funds, to try to talk up the idea that “the next recession is coming soon.” No one will go back to verify their claims later, so it’s a net-gain strategy. It is also worth noting that “fixed-income investors” (i.e. retirees) are some of the most fearful and risk-averse investors around. They also tend to invest in gold and bonds and be very vocal.

Focus on bear markets: Most bear markets often have a neg-GDP period preceding it.

• We should focus more on bear markets and less on recessions
  In terms of investment opportunities and rising portfolios, we are really concerned about bear markets. Recessions are more subjective and imprecise, and consequently don’t have as much predictive value. What seems to be more likely is that when CEO’s talk about a “recession coming”, what they really mean is “interest rates are rising”. Everyone takes the free money when interest rates are low, and then tries to shed debt and recurring costs (e.g. employees) when that money gets expensive. That may make some sense, but blaming it on a possible recession isn’t honest. Also a better long-term strategy might be slow and careful hiring of crew, so that storms can be ridden out without alarming the passengers.
• The vast majority of economic analysis is reading tea leaves
  Minor changes in metrics (e.g. interest rates, CPI, p/e ratios, inverse yield curve) greatly affect investing behavior. Metrics frequently don’t include important contextual factors, can hide underlying inaccuracies and biases, and may be subject to revision after being published. Most of this is interpreted as causal and predictive, when in fact very little of it is. CEOs and fund managers alike are reading tea leaves, but speaking publicly as though it is scientific analysis and certainty.
• We should be more critical of vague predictions, and do more fact-checking afterwards
  When you create a stock option, you specify a condition (e.g. SP500 will go down 5%) and a timeframe (e.g. within 14 days). If both conditions don’t occur, then the prediction is false and the option is typically worthless and you lose money. Thus, the prediction is either true or false, and it can be easily categorized. Most financial predictions are fuzzy, imprecise, filled with words like “may” or “could”, have no precise timeframes, and are never even reviewed later to see the actual outcome . There is an absence of “scorecards” for financial advisors, hedge fund managers, and CEOs about whether their past predictions were true, and consequently whether their future predictions are likely to be accurate.
• We need to go back to first principles more
  Nowhere is it more apparently that we think in terms of fictional stories than in the domain of financial news. We love asking “What if…” questions and then scaring ourselves into thinking it is going to occur. We tell ourselves stories such as “September is always a down month” or, “the election cycle always affects the stock market” without ever going back to see if it is true, or how often it is true. Similarly there is a lot of confusing correlation with causality, and very little verification of predications after the fact. Usually the 1% that got the prediction right (by luck) are heralded as “prophets”, and the 99% who predicted incorrectly are conveniently forgotten.
• The economy may have more to do with emotions than fundamentals
  Let us remember that money and financial markets are created by human consensus out of thin air. Money is just paper and electrons with an agreement between people as to what it represents, and what you can do with it. The valuation of a company is largely based on opinion. If people get scared and have little hope for the future, they hold their money close, cut back on expenditures, and move things into very poor investments such as cash, bonds, or gold. If people are elated and positive about the future, they enjoy life more, take vacations, buy gifts, and upsize houses. The Fed has a “fear lever” in the form of interest rates, but it is only one such fear lever, and it only impacts investor sentiment for a short time before they adjust to the “new normal”.
• Everybody loves a good apocalypse story
  Christianity, Judaism, Islam, countless doomsday cults, and even quite a few sci-fi novels have placed an “end of times” centrally within their storytelling. Fear gets people’s attention and can be used to manipulate their behavior. When people expect an imminent end of times they sell all their possessions and give the money to the cult leader. Even during extended up-market runs there isn’t a shortage of people claiming that the next bear market is near, and that “the bubble will pop soon”. While it is reasonable to expect markets to oscillate up and down, it is difficult to predict how much and when (see my accurate market prediction but inaccurate time prediction) as an example. It is also demonstrably false to always be saying “there will be a bear market next.” Statistically speaking, that would be right less than half the time, because the stock market is trending upwards overall. So watch who the cult leaders are who are profiting from the panic sell-offs and possibly copy their investment strategies.

Counter-arguments

• “But the recession is still coming”
  Yes, the next recession is coming — it always is. Financial markets work in cycles. They happen on average every 6 years. When these CEOs (and most of the rest of the world) said “the recession is coming”, they meant “the recession is coming before a large positive economic event occurs.” For a prediction to be valid it needs to include a time range. Saying “there will be a recession in the next 8 years” is close to 100% certainty. Saying it will happen in the next 6 months is much less likely to occur. Very few people are willing to specify an exact timeframe for their predictions, and that clearly demonstrates how uncertain they really are.
• “AI saved the day”
  Yes, AI may be one of the main drivers of the stock market rebounding and perhaps eventually another “bubble”, but it would likely have happened anyway. The fact remains that the bear market already occurred in early 2023, many other factors remained positive, and the fundamentals of many companies and their future plans remained strong. Perhaps it might have been slower, but the rebound was going to happen anyway. There is always going to be something driving the next rebound or the next bubble and it is very hard to predict in advance.
• “We would have had a recession if it weren’t for Fed manipulation”
  The Fed is always tweaking the economy one way or the other. In 2023 there has been a great deal of criticism that the Fed would cause the next recession due to rate hikes. In other words, the Fed doesn’t like everyone buying lots of products because it drives inflation up, so they raise interest rates to make products more expensive. However, large rate hikes occurred, and the recession didn’t happen immediately because of it. In fact, the opposite happened. This is worth repeating because it seems illogical: the Fed raised rates and the stock market went up. So the Fed has an oar, but they don’t entirely direct the boat. Undoubtedly when the next recession does happen, people will claim that it was the 2023 rate hikes that caused it. There’s too much speculation and too little validation of potential hypotheses. There are much larger influences than the Fed for markets going up or down and people want someone to blame, even when it is complete fiction.

Disclaimer: I do not hold any financial degrees or certifications. I am not a tax advisor. Your investment decisions are your own, and it is best to test strategies with small amounts of money first, preferably after extensive back-testing.