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Strategic Insights

Volume 12, Edition 3 | January 30 - February 3, 2023

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Avoiding Confirmation Bias on Groundhog’s Day

Doug_Walters Doug Walters | Articles

Read Time: 2:30 min


Are you doing enough as an investor to challenge your own beliefs? Groundhog’s Day provides an opportunity to think about how confirmation bias can lead to bad decision-making.

Contributed by Doug Walters , Max Berkovich , David Lemire , Eh Ka Paw

With Groundhog’s Day just passed, it is tempting to write again about the debt ceiling. Like Bill Murray’s character Phil in the cult classic movie, we seem to be living this same ridiculous scene over and over (if that gives you trepidation, look at last week’s Insights). But instead, I’ll take the opportunity to draw attention to confirmation bias.

Axios put out a fun piece around Groundhog’s Day, claiming that Punxsutawney Phil is 69% accurate in predicting an early Spring. Other articles claim the famed rodent has no accuracy. Depending on your point of view, you could easily find a pile of articles to back it up. This has a name – confirmation bias. It’s the tendency we have as humans to seek information that supports our beliefs. This is a big problem for investors and can lead to bad decision-making.

Studies have shown that if you own a security – say Apple (AAPL) – you are more likely to seek out articles confirming why you should continue to hold it than those challenging your beliefs. Slipping into confirmation bias is all too easy in this digital age. You can join an Apple stock fan group on Discord or Reddit and surround yourself with like-minded individuals telling you everything you want to hear. Platforms like Facebook bombard you with posts about anything you vaguely expressed interest in.

So, what is an investor to do? Awareness is the first step. Acknowledging your bias will empower you to seek information that challenges your beliefs. I also recommend focusing on facts, not hyperbole. Today’s known facts are far more useful than tomorrow’s speculation. We call that evidence-based investing.


The Fed raised rates again as expected

The 25 bps rate increase was expected but nonetheless celebrated by the markets on Wednesday.

Headline of the Week

Is the Fed Bluffing?

The market’s reaction to the most recent Fed rate increase conjures images of a high-stakes poker game. It’s as if the market is saying, “We’ll see your 25 bps rate increase and call your bluff by raising stock and bond prices.” The market’s rationale for going “all in” is a recognition that rates may continue to move higher over either one or two more Fed meetings, but there is tremendous doubt that the Fed will be able to keep rates high for as long as they are saying they will. Like the odds displayed on TV screens during poker tournaments, the market’s side bets indicate that the odds for interest rate cuts before year-end are high.

In Vegas, poker games end with a clear winner and many losers. In this case, it is possible that both sides could win. This oddity is possible because the Fed and markets are playing for different pots. The Fed is concerned exclusively with getting inflation back under control and under 2%. Markets want the bear back in hibernation and the bull to run freely. The soft landing, where inflation is reined in without crushing employment or economic prospects, is the key to both hands winning.

The Week Ahead

The first week of February was a blockbuster week for market-moving news. The 2nd week of February, not so much. Speeches and Earnings reports may be the headline catchers this time.

Chairman to Chairman

The Federal Reserve Chairman Jerome Powell is scheduled to appear at the Economic Club of Washington D.C. for a live chat with the club chairman, David Rubenstein.

  • After delivering a ¼ of percent rate high and maneuvering words to keep the market rally going on Wednesday, can the wordsmith keep the party going?
  • Rubenstein is no slouch in his own right. The billionaire is the co-founder and co-chairman of private equity giant Carlyle Group.

Pound for Pound

The fourth quarter Gross Domestic Product (GDP) for the United Kingdom will be released next week.

  • The British economy is expected to print growth both month over month and year over year.
  • If expectations are correct, the economy will narrowly avoid a technical recession. However, high inflation, high energy prices, and strikes by public sector workers certainly did not do the economy any favors.
  • The British GDP contracted slightly in the third quarter, so avoiding a negative quarter will avoid a recession technically.
  • With as many obstacles as the U.K. economy had to overcome, a positive result will help the currency claw back some ground against the U.S. Dollar. At the same time, a slow economy may stir the Bank of England to slow the monetary tightening.

Hot and Cold

With the big central banks leading off with rate actions, other banks are on the clock, and this week we go down under for Australia, over to India, and up north to Sweden.

  • The Reserve Bank of Australia has a market-assigned probability of 88% of a hike of ¼ of a percent to 3.35%.
  • Australia is very sensitive to the Chinese economy. While the post-Covid reopening of China is good news, it does create inflationary pressure for Australia, so commentary from Governor Phillip Lowe will be very important.
  • Australian inflation in December was running hot at 8.4% year over year, which was even stronger than in November.
  • The Reserve Bank of India’s decision appears less certain, but India may be ready to halt hikes. The 6.25% interest rate is already higher than the inflation rate.
  • Sweden’s Riksbank is expected to hike by ½ of a percent to tame inflation, but with the Swedish GDP down ½ of a percent in the fourth quarter and housing prices down 15% from a year ago, new Governor Erik Thedeen may have to play it cool.
  • Experts have penciled in another ¼ of a percent hike in April, marking the top of the rate cycle up north.

You Don’t Need a Ticket… This Ride Is Free!

After a Tech heavy week of earnings, earnings season takes a more consumer-centric turn next week.

  • Chipotle Mexican Grill (CMG), Toyota Motors (TM), PepsiCo, Inc. (PEP), CVS Health Corp. (CVS), AstraZeneca, PLC (AZN), and Unilever, PLC (UL) are the biggest names on the calendar.
  • However, The Walt Disney Co. (DIS) may be the one that brings the most entertainment.
  • Disney has theme parks, ESPN, streaming, studios, an activist investor, a return of CEO Bob Iger for a sequel, and a miserable 2022 stock performance.

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