Written by: Corey Janoff
It’s a new year and if you read any financial periodicals, you will likely see each one come out with their own set of economic and stock market predictions for the coming year. These are cute and fun, because nobody really knows what is going to happen. And the best part about it for the prognosticators is that by the end of the year, nobody will remember what they predicted at the start of the year! They could be completely wrong, yet very few people will remember, or even care.
Hindsight is 20/20 as well. So called “experts” will look back at recent events and be able to explain why those events happened and what to expect, or prepare for, in the near future.
For example, looking back on it, 2008 was pretty easy to explain. Banks over-leveraged themselves, borrowed way too much money and invested in assets that were unlikely to pan out under economically stressful times. In layman’s terms: the banks all borrowed money from each other. They then lent money (mortgages) to broke people who didn’t have real jobs so the broke people could buy houses they couldn’t really afford. And when interest rates on the mortgages adjusted and/or people lost their “jobs,” they didn’t pay their mortgages. As a result, the banks holding the mortgages couldn’t pay back the money they borrowed in the first place to issue the mortgages. And since they were all borrowing the money from each other, everyone was caught with their pants down.
Any idiot could have seen this coming….except almost everyone didn’t. Until it happened. Then it was pretty obvious after the fact.
Recently, you have probably read a number of articles explaining why global stock indices have declined 10-20% the final quarter of 2018. Where the heck were these articles in the summer!? It would have been useful to have this insight back then, before stocks slid.
But it never works that way. You get the information after the events occur. If you somehow get the information before the events occur, that is considered insider trading and you go to jail if you act on it.
Before the events occur, the best you can get is a guess that is no better than a coin flip. I heard a quote at a conference once that goes like this: “The only function of economic forecasting is to make astrology look respectable.”
When I Google it, apparently a guy named John Kenneth Galbraith was the one who said it. Wikipedia says he was a Harvard economist who served in multiple presidential administrations. Sounds like a pretty smart dude. Well, if he thinks trying to predict the short-term future of the economy is no better than reading your horoscope in the Sunday paper, we should all take market predictions with a grain of salt. Maybe we’re better off digging out the oldto see what will happen (click that link for an online version of Magic 8-Ball).
What would be more entertaining than trying to predict the future is to look up the 2018 market predictions from a year ago and see what people thought would happen. I’m sure some would have predicted a rise in stocks. Some would have predicted a decline in stocks. Some would have predicted bond yields to increase. Some would have predicted stagnation in yields. Very few would have predicted Elon Musk would almost be ousted from his company by the SEC and fined millions of dollars because of a silly tweet.
If you read the previous year’s predictions and compare to what actually happened, you will probably have little faith in the accuracy of future predictions. So you might as well ignore market predictions altogether.
Speculation vs. Strategic Adjustments
When I talk about ignoring market predictions, I am talking about the speculative forecasts that may or may not come to fruition. For example, when you see an article titled, “Ten Stocks to Buy in 2019,” who knows if those stocks will turn out to be successful investments in the calendar year of 2019? Trying to predict short-term movements consistently and repeatedly is near impossible, so proceed cautiously if you are considering acting on that information.
However, making strategic adjustments to your portfolio within the confines of your overall target allocation, based on sound research and proper due diligence, can be very beneficial.
For a hypothetical example, let’s pretend we are in a recession and national real estate prices have declined by 25% from their recent peak and there has been a higher than average home foreclosure rate. Let’s also pretend the target allocation for real estate in your portfolio is 5%, with a minimum of 0% and a maximum of 10%. Given historically real estate has done a good job of holding its inflation adjusted value, you might conclude that now could be an opportunity to slightly increase your exposure to real estate. So when you rebalance your portfolio, you increase the real estate allocation to 8-10%.
You aren’t predicting that real estate prices will rise in the next 6 months. You know very well there is a chance real estate prices could continue to decrease. 90% of your portfolio is still invested in other asset classes to maintain proper diversification, in case real estate continues to lag. You haven’t completely overhauled your investment strategy (still remaining within your tolerance levels of 0-10%). You have simply skewed your allocation a little bit more to an asset class that appears to be attractive from a potential future growth perspective. The entry point is more attractive today than it was when prices were 25% higher.
Making minor strategic adjustments such as this to your portfolio over time can help achieve your goals. No guarantees that it will lead to additional returns, but it is a more logical strategy than making a knee-jerk reaction based on a news headline.
So with that, here are my 2019 Market Predictions!
I predict major US stock indices will either rise in value, fall in value, or end the year roughly where they started.
I predict that at some point during the year, stocks will rise. After they rise for a period of time, there will be a subsequent period of time during which stocks will fall.
I also predict that stocks will fall at some point during the year. After they fall for a period of time, there will be a subsequent period of time during which stocks will rise.
You may be shaking your head, but you know I’m right.
I predict the same thing will happen with international stock indices as with US stocks.
I also predict that international stocks are unlikely to move in lockstep with US stocks.
I predict that bond prices will either rise, fall, or remain mostly unchanged.
I predict that the majority of the return from bonds will come from the yield (interest payments) and not price appreciation/depreciation.
I predict that real estate prices in the US will either rise, fall, or remain mostly unchanged.
I predict that in some cities real estate prices will rise and in other cities real estate prices will fall.
I predict that the US dollar will rise in value compared to some foreign currencies and fall in value compared to other currencies. With some currencies, the exchange rate will remain mostly unchanged.
Which ones, specifically, I’m not so sure about. The Magic 8-Ball wouldn’t give me a clear answer.
What Does This Mean For You?
I believe that if you work hard, treat people the way you wish to be treated, mostly ignore news headlines, and stick to a financial strategy focused on achieving your goals, you have a good chance of achieving those goals.
If you watch CNN and Fox News, they both talk about the same topics. One broadcast will look at a particular issue favorably. The other broadcast will look at it unfavorably. One will say, “This is a good thing and here is why.” The other will say, “This is a bad thing and here is why.”
The source that exudes political views that are most similar to yours is likely the source you are inclined to believe.
Keep that in mind as you read predictions about the future. You have inherent biases that extend far beyond politics. Depending on where you live, your job, hobbies, friends, family, upbringing, life experiences, etc., you have a set of preconceived notions. All it takes is a news source to “predict” something that aligns with your beliefs and a little thing called confirmation bias sets in.
We tend to tune out information that goes against our preconceived notions and listen to sources that confirm what we already thought might be possible.
Of all the news stations out there, you have one in particular that you watch most, or exclusively, to get your news. Is it because they deliver the most accurate and pertinent news for your situation? Heck no! It’s because you tend to agree and align yourself the most with their beliefs and worldviews! People like to listen to other people who agree with them! Simple as that.
Republicans would argue that having a Republican president is good for the economy and the stock market. Democrats would argue against that. Well guess what? There is no statistical evidence that can confirm that one political party is more favorable than the other in how it affects the economy.
People are going to shop at Wal-Mart, drink Pepsi, and eat at McDonald’s no matter who is in office.
Not only do economic predictions have the accuracy of a coin flip, but you are most likely to believe the one that you want to believe. So be careful when reading predictions about the future. And remember your own biases when reading those predictions.
Better yet, don't even read economic predictions. Do something better for your health. Go on a run. Do yoga. Read a book. Play with your kids - they grow up fast.
Please don’t take anything in this post as an economic forecast, as we cannot predict the future with any certainty. Consult with your financial advisor before acting on any information.Any investment involves risk of loss, including total loss of principal. Being diversified does not insulate from potential losses.