I’ve written about stock market predictions before – here and here. The central message is that the bulk of these predictions turn out to be wrong.
There’s always someone forecasting doom and gloom, the next big recession, or some major shift in the Western Order. I recently came across another one of these predictions in a prominent online news outlet –
Here is the opening paragraph –
Is this it? For years we have been warning that markets have lost their grasp on reality, that interest rates are too high, that the US economy cannot keep growing indefinitely, that a recession in the US is inevitable.
Who exactly is the ‘we’ the article is referring to? When it says ‘we’ have been warning for years, it implies that they’ve avoided growth assets (equities) for quite some time. And yet, the past few years have seen some of the best market returns in decades. So, this ‘we’, and whoever has listened, have really missed out.
But perhaps it’s correct on this one as it’s forward looking –
The first few weeks of this month may go down as the moment when reality, finally and inexorably, bit. And bit hard.
Well, this piece came out on the 6th of August. Was that the start of the fall? The S&P 500 had just experienced 3 consecutive days of decline. The Japanese markets had just dropped 10% in a day..
Let’s see what actually happened.
The chart below shows performance of the S&P 500 year-to-date. I’ve marked the ‘reckoning’ (6th of August) in red.
Indeed, that drop may have seemed scary, but a 10% decline during the year is normal for a stock market. Nothing out of the ordinary.
The chart below shows the performance of the Japanese stock market year to date – see that sharp drop off in August?
It seems the ‘reckoning’ lasted all of 3 or 4 days. The market bounced back in both cases. Both indices have generated excellent returns this year despite the very normal volatility.
But it makes me wonder. Is the author 100% in cash? What of the investment firm they represent? Have their clients been out of the market in expectation of this inevitable reckoning? Did they miss out on the last few years of market growth?
Unfortunately, this forecast will soon be forgotten. We will continue to see predictions of doom and gloom for years to come. Eventually, someone will get it right, and the press will celebrate them.
And then we’ll see a cult-like following (cue Michael Burry) around all future predictions by that individual, which will inevitably leave their followers worse off.
Warren Buffet has said it many times over: we can’t time the market. Yes, markets sometimes become overvalued and do crash. Corrections, bear markets, recessions, and black swan events happen from time to time, usually every 10 to 20 years.
We need to accept that predicting the economy is hard. The stock market gets it wrong too.
Rather, we should focus on what we can control. If you have a financial plan and a well-structured portfolio designed to withstand the inevitable ups and downs of the market, there’s no need to worry about events that may or may not happen and are really out of our control.
