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The 720 Report: April 2024

May 01, 2024

The 720 Report - 720 Thoughts in 120 Seconds: April 2024

Conviction. Conviction is often a judge of confidence in an opinion or idea. When investing, conviction often helps us understand the risks associated with our decisions. Why am I talking about conviction?

Consider the market’s view of the Federal Reserve’s interest rate forecast for 2024. As we entered the year, the market had factored in a prediction of the Federal Reserve providing 6 rate cuts. As I write this on April 25th, the market has shifted their rate cut expectations from 6 to 1, with some analysts calling for a chance at potentially no cuts at all. So, with what confidence or conviction can the market predict the future? Today that conviction sits low, contrasting with nearly 4 months ago when conviction felt very high.

In a conversation last month with our Director of Investments, we discussed the topic of conviction and how we are often quick to discount just how confident we are. Here’s an example: if I were to flip a coin and ask you whether it was going to land on heads or tails, with what conviction do you think you’d be able to pick correctly? Many of you would likely say 50%. Why? The math supports a 50% chance of heads or tails, as there are only two outcomes.

So, let’s go back to the Federal Reserve. They analyze the labor market, inflation data, GDP, consumer spending, the price of manufacturing, etc. to help determine where short-term interest rates should be. With so many underlying variables, why did the market start the year with such conviction that they could accurately forecast what the Federal Reserve would do? My thesis, and newly formed opinion, is that we often apply a premium or discount to confidence. If we feel optimistic, we exaggerate our confidence, while conversely if we have uncertainty, we underestimate our confidence.

Here’s my ultimate takeaway - Until you have the underlying math or reasoning to support and defend a thesis, it’s okay to say, “I don’t know”. Don’t discount or apply a premium to your confidence level until you understand what factors are influencing your conviction. I realize this is easier said than done. I too am guilty of applying a premium to my conviction. So, here’s to growth and learning and getting more comfortable saying, “I don’t know.”  

Thanks for reading. See you next month.


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