Why are stock analysts so bullish? Why are only 3% of analysts recommending selling S&P 500 stocks, despite a near-doubling of stock prices over the past two years, the U.S. and European debt crises, and a sick economy that does not seem to be getting well? According to Bernard Condon’s MSNBC.com article (“Why Wall Street is so relentlessly optimistic”), the answer is: it is the ostrich syndrome. “What’s the difference between an ostrich and a Wall Street analyst? An ostrich occasionally takes its head out of the sand.”
“There’s a lot of optimism here,” Howard Silverblatt, chief index analyst at Standard & Poor’s, was quoted as saying, adding: “They’re predicting the second half of the year will be the best ever for profits. Do you feel that way?”
Is “relentless bullishness” under the circumstances a contrarian sell signal? The 3% sell-rate has not changed from a month earlier when the economy was reportedly considered to be in better shape. “All else being equal, you want to sell if you think profit growth could slow,” Condon writes.
S&P’s Silverblatt reportedly thinks many analysts will eventually lower their profit estimates, but notes that most prefer to wait for guidance from corporate executives.
“During economic recoveries when recession-depressed stocks are most likely to rise, analysts look like geniuses, said Condon, adding: If you’re counting, that’s four times in 30 years. It’s the rest of the time investors should worry about.”
Stocks recently fell nearly 7 percent from their April peak. Conventional wisdom is that a 10 percent drop marks a correction.
While no one knows where the market will head, when, or for how long, and with the usual caveats about the folly of market-timing, Condon’s question should not be ignored. Investors’ portfolios should be examined and the risks assessed in light of their investment objectives and time horizon.