Baseball legend Yogi Berra famously remarked, “It’s tough to make predictions, especially about the future.”
The New Year is a customary time to speculate and prognosticate.
With fresh hopes and renewed resolutions, journalists and Wall Street pundits invariably dust off their crystal balls to forecast what they foresee in the economy and financial markets for 2016. In a digital age, however, past forecasts are always available online to recheck and compare, so it’s getting much harder for so-called “experts” to hide embarrassing bold predictions gone awry.
The ignominy that goes with making bold forecasts gone bad was highlighted in a Australian Sydney Morning Herald article that recounted the many bad calls U.S. economists made last January about how 2015 would turn out. These included getting the timing of the Federal Reserve’s interest rate increase wrong, incorrectly calling for a rise in long-term bond yields, and assuming an end to the commodity rout.1 Overall, the predictions were worse than worthless.
Closer to home, for the broad U.S. equity market, 22 strategists polled by the Wall Street Journal2 estimated an average increase of 8.2 percent for the S&P 500 for 2015, with predictions ranging from 2 percent to 14 percent. A fairly standard normal distribution by statistical standards, to be sure, but NO ONE predicted a negative return for the broad based index–which is what happened. Even though the U. S. market had a very modest negative return, the benchmark still ended in the red, and still continues it’s decline.
In the U.K., a poll of four dozen fund managers, traders, and strategists also published in early 2015 forecast that the Financial Times Stock Exchange Index (FTSE 100) would be at 6,800 by mid-year 2015 and at 7,000 by year-end. As it turned out, the FTSE surpassed that year-end target by late April to hit a record high of 7,103 before retracing completely backwards to 6,242 by year-end.3
Why expert’s predictions so often go awry
So, if veteran economists can’t reliably predict the direction of broad macro variables of which they are supposed experts, imagine how tough it is for ordinary stock analysts and day traders working off internet searches to pick individual winners. Even a stock like Apple, which for so many years surprised on the upside, disappointed many forecasters last year with a 4.6 percent decline.4
There is an understandable tendency for Wall Street pundits and economists to “run with the pack” when it comes to predicting where the S&P 500 might finish a given year. Coming out with a predicted target that wildly different from consensus means risking your reputation, and possibly a career—it’s much safer to be wrong when your forecast is well within the consensus. That may explain why the average forecast of top strategists surveyed by Barron’s called for a 10 percent increase in the S&P 500 for 20165— exactly what they predicted in 2015! 6
Extrapolation is a very simple method of prediction—usually, too simplistic to work very well. Some of the most famous failures of prediction are the consequence of simply naively extrapolating the current trend a bit too far for too long.(By the way, a 10 percent rise in the S&P 500 is very close to U. S. stock market annualized returns since 1926.)
10 Predictions that look beyond today’s headlines
At Professional Financial, we believe that constructing your portfolio based on an popular pundit’s stock picks or timing recommendations, or based on economists’ general expectations for interest rates, the economy, or currencies is not a sensible or prudent way of preserving your wealth or accumulating resources to confidently maintain a lifestyle for a lifetime. Markets’ realized returns have a disturbing habit of confounding popular market expectations, especially of well-known “experts,” at critical turning points. So, a more informed approach to guru glut or internet overload is developing a professionally planned investment management strategy that works with the dimensions of capital markets and stays globally diversified, with risk-weighted allocations closely aligned with your family’s guiding values, goals, needs, dreams, and circumstances.
Of course, we would stop no one from expressing their private opinion about the future. We have our own opinions. We all may speculate about what might happen in the economy, in the markets or in the world at large. Fearful events occur daily, and may even worsen globally as the year progresses onward. The danger for a family’s wealth preservation comes when investors make serious decisions that change what may have been a sound portfolio strategy simply due “expert” opinions about the future published by the media. Journalists bring a new round of expert opinions, often provided only because a reporter with a deadline simply called to ask a so-called “expert”. So, for those who love forecasts, here is our un-asked for list for 2016:
- Markets will go up some of the time–and down some of the time. And maybe down by quite a lot.
- There will be unexpected news. Some of this news will move prices dramatically.
- Acres of newsprint will be devoted to the likely path of interest rates, up or down.
- Acres more will speculate on China’s growth outlook, or the lack of it.
- TV pundits will frequently and loudly debate short-term market direction.
- Some economies will strengthen. Others will weaken. These will change next year.
- Some companies will prosper. Others will falter. These will change from year to year.
- Parts of your portfolio will do well, some will do poorly. We don’t know which or by how much.
- A new popular book will say the old rules no longer work and that everything has changed.
- Another new book will say nothing has really changed and the old rules still apply.
Since forecasts are so hard to get right, you will notice we made very general predictions, with a broad margin for error, and an equally broad margin for safety. Like a weather forecaster predicting wind, rain, heat, and cold for interstate travelers heading east to west over the course of a single day, your audience should prepare themselves for all climates, and so do our forecasts.
From news reports and client calls this week, we find investors are seriously discomfort with unaccustomed U.S. market volatility, especially after several years of relative stability and predictability. Hedge fund managers on leverage and novice investors alike are selling in droves. The U. S. media’s favorite scapegoat is the Chinese government and their peculiar financial policies. But in a CNBC interview, former Dallas Federal Reserve president Richard Fisher made this confession regarding the defacto fourth branch of U. S. government: “What The Fed did, and I was part of it, was front-loaded an enormous market rally in order to create a wealth effect and an uncomfortable digestive period is likely now,” said Fisher.7 But how can even an expert insider’s assessment of a prime cause of market turmoil be translated into successful investing decisions?
Solution: Focus on what you can control
The future is always uncertain, and it’s certainly tough to make predictions that always prove true. Unexpected events inevitably occur, at home or abroad. Some events will have worse consequences than expected; others will turn out much better. Some you thought would be bad will eventually turn out to be good for you, and vice versa.
Risk, and accepting risk consistently, is integral to investing. In Milton Freedman’s famous words, “There is no free lunch.” Tough markets separate the owners of risk from the renters of risk. The only sensible philosophy for successful long-term management of investing risk is: focus on what you can control, not on what you cannot control. The investor must focus on what truly matters for investment management, and on taking only actions that add value. Control begins with selecting and ten maintaining the right investment strategy over the ups and downs of business and market cycles. What’s needed is a wealth management plan that fits that investor’s particular needs, values and goals, as well as their risk tolerance and financial circumstances. Professional Financial clients rely on decades of research in the science of capital markets and special associations providing us with access to vehicles with advanced portfolio structure and investment implementation grounded in decades of research around the dimensions of returns, and collectively look back on many successful financial outcomes for those clients who stuck with their planning.
Making informed decisions about what matters for planning your important financial concerns demands a truly informed approach. Finding the right wealth manager—an independent advisor with a proven process to apply academic theory and research though a disciplined process to practical investment strategies so it’s clients may benefit from what investment markets have to offer—can not only help you achieve your family’s goals and dreams, but also help you achieve peace of mind throughout financial challenges, market uncertainties and unending political changes.
- Malcolm Maiden, “The Year Market Economists Failed to See Coming,” Sydney Morning Herald, December 30, 2015.
- “Strategists Expect Stocks to Keep Climbing in 2015,” Wall Street Journal, January 2, 2015.
- “Five Fund Strategies to Ride Rising Markets,” The Times, January 3, 2015.
- “Seven Stocks to Buy for 2015,” CNN Money, December 31, 2014.
- “Stock Market Outlook 2016,” Barron’s, December 12, 2015
- “Outlook 2015: Stick with the Bull,” Barron’s, December 13, 2014
- Accessed at: http://www.zerohedge.com/news/2016-01-05/we-frontloaded-tremendous-market-rally-former-fed-president-admits-warns-no-ammo-lef