According to an article published a few years ago in the Journal of Clinical Psychology, there are two cognitive strategies available to any individual in the pursuit of certain goals: ’strategic optimism’ and ’defensive pessimism’.
In the former case, an individual would set optimistic expectations for his or her own performance and avoid extensive reflection, especially when it comes to possible negative outcomes. In the latter case, the individual would set unrealistically low expectations, and then spend a significant amount of energy to reflect upon all the possible negative outcomes to prepare for them. In this case, negative thinking operates in a positive way as it harnesses anxiety.
Is one of these strategies better than the other when it comes to achievements? No. According to research, they tend to lead to a similar performance. There is thus no fundamental advantage, or disadvantage, in forming an optimistic or pessimistic perspective with respect to key variables when seeking to achieve some specific objectives. What actually matters the most, according to the authors, is to follow the cognitive strategy that suits one’s best given the circumstances.
Anyone who would have missed the August news flow would not have missed much. It was calm. Dead calm, with a VIX literally flatlining in the low teens. More Fellini than Tarantino for sure. On the macro data front, there was some good news (UK economy, Brent prices fluctuating around $50, and a resilient euro) and less good news (August payroll and industrial production in the US, Japan economy), but nothing to lead the world to cardiac arrest as China did a year ago. Overall the bias was neutral as best expressed by the Global Purchasing Managers’ Index for August which is staying just above its breakeven level, as in July (50.8 vs. 51). This remains akin to the kind of body temperature when one doesn’t know whether to send a kid to school or allow it to rest at home.
So this leaves us to where we were in July when considering potential risks: A China slowdown post the H1 policy boost: mid risk, mid impact; A political crisis in Italy around the constitutional referendum: mid risk, mid impact-potentially underestimated, in my view; The US elections (low risk, low impact).
And monetary policies. Whilst a September Fed hike should be heavily discounted, another mistake remains possible. In the meantime, Japan seems to be flirting with the notion of a fiscal-monetary mix being rebalanced away from monetary stimulus. Finally, earlier this week, the ECB sounded mildly hawkish, implying a lower likelihood of a full QE extension post March 2017. The red-hot European bond market, until then subject to deeply negative views on European growth, got surprised and reacted strongly. Sudden market moves in the global bond market and steeper interest rate curves are becoming more probable, with implications for the stock market which has been driven by relative yield considerations. The low volatility environment of recent weeks is unlikely to last (does it ever?).
The positive risk factors are easy to identify since corollary: There is some hope for a US economy acceleration into H2 and 2017 for anyone prepared to look at the underlying trends of the last few months, beyond the August data. And in Europe, our economists talk of an investment revival based on a recent survey I am more optimistic about the US than about Europe at this juncture.
With volume and profitability likely to remain under pressure in the Diversifed Industrials space, further restructuring measures and portfolio management may be required when considering the sector in aggregate. Industry participants will remain forced to make their own luck at the operational and strategic level—it is now a well-known theme. Opting for defensive pessimism when implementing relevant measures should appeal to many.