By: Matt Garrott
I have a bold prediction to make. Yes, I know I talk all time about how Fairway isn’t in the prediction business and that basing any long-term financial decision on a forward-looking prediction is a fool’s game, but I’m going to do it anyway:
I predict that the 10-year return on the S&P 500 is going to rise substantially in the next several quarters. Wow, that sounds bold…is Matt really saying that he thinks the market is going to rise big-time the rest of this year? Of course I’m not saying that! My honest answer is I have no idea what the market will do in the next few quarters.
However, I do know that March corresponds with the low point of the financial crisis ten years ago. So, we are in the midst of a time when 10-year results will start removing huge negative returns (the S&P 500 fell 46.1% from 7/1/2008 through the bottom on 3/9/2009). As such, unless the coming quarters are as bad as we saw in late 2008 and early 2009, returns over the previous 10 years are going to show continued improvement. In fact, if 2018 ends the year flat, the 10-year return on the S&P 500 will suddenly exceed 13% per year!
This leads me to a few important thoughts and reminders:
- Historical data is easily manipulated and can be deceptive. What’s more important, 10-year returns that average 13% or 11-year returns that average less than 5%? Both happened, but a completely different picture can be presented depending on which data set you choose to present.
- Too often, future outlooks are based simply by looking at the past. Many pundits just predict a continuation of recent history – basically, a momentum prediction – to get their soundbite on TV. However, while the past tends to repeat itself over longer stretches of time, the past is often a terrible predictor about the near-term future.
- Instead of talk about what might happen, we prefer action. Does the portfolio need rebalanced? Are there losses available to be harvested? These actions add value without the need to model or predict the unpredictable whims of the market.
