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Where's the market downturn? What we got wrong.

Where's the market downturn? What we got wrong.

June 07, 2023

As investors and fiduciaries, we strive to make accurate market predictions and capitalize on opportunities while ensuring we protect the wealth our clients have already worked hard to build. However, it's crucial to recognize that even the most experienced professionals can sometimes get it wrong. In this blog post, I wanted to share our insight into what we got wrong this year after predicting a significant market downturn based on reliable macroeconomic data and basic fundamentals.


Accountability in Wealth Management:

One of the fundamental values I prioritize at KEY Advisors Wealth Management is accountability. My team and I make sure to hold ourselves accountable for our actions. While receiving recognition for accurate predictions is nice, it's equally important to learn from our mistakes and take responsibility for them. As the CEO and co-founder, I believe in being transparent about our missteps and showing that even financial experts can make occasional errors.


Underestimating Government Intervention:

Over the past year and a half, we held a bearish outlook on the market. However, our analysis failed to fully account for the extent of government intervention and its impact on the economy. We underestimated the government's willingness to inject substantial amounts of money into the system as a means to stabilize the markets.


The Stimulus Effect:

In March, when liquidity issues led to bank failures, the government swiftly stepped in to provide a backstop, guaranteeing the safety of depositors' funds. This intervention effectively acted as a stimulus, contrary to our expectations. It temporarily halted the market's downward trajectory and initiated a substantial rally. Following the government's intervention, the stock market experienced a significant rally. The S&P 500 index, for example, has risen by 10.6% since the March low of 3,861 and the NASDAQ 18.7% increase since its 2023 March low, both defying the predictions of a market decline.


The AI Effect:

Another blind spot was the impact that the frenzy around Artificial Intelligence (AI) has had on the stock market. For instance, NVIDIA (NVDA) is the latest mega-cap with a $1T market cap because of the AI boom. NVDA was trading at just $168 at this time last year and starting the year at just $143. Since then, it’s been on a tear, with a 173% increase as of yesterday’s market close. In fact, you have to take a look at just five stocks: Microsoft (MSFT), Google parent Alphabet (GOOGL), Nvidia (NVDA), Apple (AAPL), and Meta (META). These five stocks are responsible for the S&P 500's entire year-to-date return. Furthermore, Jessica Rabe, co-founder of DataTrek Research, noted that about 25% to 50% of those gains are owed to "the buzz around artificial intelligence." It’s my opinion that these stocks have become a flight to safety in a market that has otherwise been flat or negative, and the gains in these stocks are mostly speculation on the future impact of their bottom line. NVIDIA is the big winner since it sells the hardware that will drive the AI race. How it will be monetized in the future has yet to be realized.


The Role of Fundamentals:

While the market may sometimes deviate from fundamental indicators, we firmly believe that fundamentals matter in the long run. Our dedication to fundamental analysis remains unwavering, providing a solid foundation for making informed investment decisions. However, it's crucial to acknowledge when short-term market dynamics defy the prevailing data.


Headwinds on the Horizon:

Looking ahead, we anticipate increasingly challenging headwinds as the government's options dwindle. With the debt ceiling raised, Treasury Secretary Yellen faces the task of replenishing the Treasury General Account while the Federal Reserve continues quantitative tightening (QT). Stimulus measures only serve to postpone the inevitable, potentially exacerbating the economic challenges we foresee. Additionally, Consumer debt reached a record high in 2023, reaching $17.05T in Q1 of 2023. This accumulation of debt can be a cause for concern as it puts a strain on household finances and potentially hampers future economic growth. Our economic headwinds can be summed up into one word: liquidity and it is drying up quickly.


The Importance of Liquidity:

Liquidity serves as the lifeblood of the financial system, and a closer look at lending practices by banks reveals a concerning trend. Bloomberg recently reported that US bank lending contracted by the most on record in the two weeks ending March 29, with commercial bank lending dropping nearly $105 billion, the most in Federal Reserve data back to 1973. This contraction in lending shows that banks are less willing to extend credit to consumers and businesses. This tightening of lending standards takes money out of the market and reduces liquidity, raising concerns about the economy's overall health and suggesting potential future challenges.


Maintaining a Cautious Stance:

Delaying the necessary adjustments to address the underlying economic issues may have detrimental consequences. It could foster a false sense of security and draw more people into the belief that everything is fine. While we don't want a recession or a major market downturn, ignoring the warning signs would only prolong the inevitable and potentially worsen the outcome.

Additionally, despite the delay in our predicted market outcome, our overall thesis remains intact. We continue to exercise caution on behalf of our clients, seeking opportunities while being mindful of the potential risks. As we head into the summer, we maintain our belief that the worst is yet to come from both an economic and market perspective.



For those new to investing, it's vital to acknowledge that even the most experienced experts can make mistakes regarding market forecasts. Embracing accountability and learning from mistakes is crucial for growth and improvement. Our misjudgment of government intervention serves as a reminder to carefully consider all factors at play, both macro and micro and to adapt our strategies accordingly. Moving forward, we remain committed to providing our clients with diligent wealth management services and navigating the complexities of the ever-changing financial landscape.

Thank you for reading, and I hope that you were able to learn something. We’ll continue to share our perspective and market insights. I wish you and your families a winning week.