At any given time, there are always several impactful events happening at once in the global economy and the capital markets. Earnings reports, inflation readings, central bank decisions, trade deals, geopolitical chess moves with weighty implications. Taken together, all of these factors hold some sway over the direction of stocks and bonds, so it makes sense that investors would want to consider each one closely when making an investment forecast. Being analytic and detail-oriented makes sense, and is very worthwhile in my opinion.
But thorough analysis also poses a problem: in my opinion, investors too often overemphasize the negative, more fearful/worrisome factors, while giving less consideration to the pricing power of the positive factors. It’s human nature to be drawn to and captivated by uncertainties.
Indeed, we tend to care more about the factors/events/things that appear more ‘high stakes,’ more consequential, more uncertain. During the plague in London
in the mid-1600’s, for instance, people listened profoundly to the predictions of fortune tellers and fanatics, with prophecies and doomsday forecasts ruling the day. For people during that time, the risk of not listening and therefore paying the price was far too high.1 In other words, the sheer magnitude of uncertainty during that period forced many people to hedge against the worst-case scenario, as fanatic as that scenario may have been.
Here’s my point: historically, we see this pattern in the investment world during almost every business cycle, and it runs both ways. The dot com and cryptocurrency surges, for example, lured investors into the possibility of making huge sums of money quick, without any clear mechanism for understanding or measuring the risk of the investment. For some investors, the risk of not listening and not acting felt too high to pass up.
On the other side of greed you find fear and uncertainty, which can have a similar effect on investor psychology. Take the 2008 financial crisis, for example. In that year, the front page of the Wall St. Journal featured an article stating that economic decline, the collapse of the dollar, and moral degradation would lead to civil war in the United States by 2010.2 That’s just crazy, right?! Not to many people at the time. The gravity and hysteria surrounding the financial crisis gave many investors no choice but to take doomsday forecasts seriously.
In short, when the world feels most chaotic, just about any prediction can make sense. But many of those predictions are bad ones.
In my view, it all comes back to the same lesson long-time investors learn time and again (and again and again): investors are almost always better off ignoring the ‘get rich quick’ forecasts just as much as ignoring the doomsday ‘end of the world’ forecasts.
Stocks are volatile. Bull markets happen, bear markets happen. Sometimes it feels like sky is the limit for stocks, other times it feels like there is no way stocks can ever recover from the grips of a bear. But at the end of the day, and over long stretches of time, there have been instances of stocks moving higher in spite of all the good and the bad. We’ve long held that the key to success is the steady hand – a measured, disciplined approach taken over decades where equity exposure over long stretches of time is arguably the most important feature. History has shown that this strategy has the ability to work in the long run. The long-term investor who strips away the noise – who avoids the bad forecasts – is likely to achieve the most long-term success, in our view.
Bottom Line for Investors
At the start of every year, around twenty-two chief market strategists at major banks make a prediction for how the S&P 500 will perform in that year. Many investors put great faith in these forecasts, accepting them as truth upon announcement. But, we believe that past data suggests that they shouldn’t: the average difference between the market strategists’ forecasts and the actual performance of the S&P 500 is 14.7 percentage points per year.3 Wrong by double digits.
The bottom line for investors is not to avoid market forecasts, or to avoid making them yourself. It’s to remember that any prediction can sound right if the stakes are high or a situation feels important enough. Some may be right, some may be wrong. But, what matters most, in my view, is sifting through all the noise.