December is home to many seasons – the holiday season, shopping season, skiing season, and cold/flu season. One of my favorite seasons, though, is forecasting season. At the end of every year, investment firms feel compelled to make predictions about the market environment for the coming twelve months. Though they don’t usually say this to consumers, these are more for marketing purposes than to provide any semblance of actionable investment advice. Vanguard’s research¹ shows that the last 12 months of rainfall is a better predictor of stock market returns than many financial metrics such as trailing 10-year returns, trend GDP growth, and corporate profit margins. Below are some common techniques we are sure to see as investment firms try to gather some last-minute assets (and year-end bonuses) by trotting out their expert fortune-tellers.
Extrapolating the recent past into the future – The extrapolators ride the trend of the day whether it’s the tech bubble, peak oil, or even a bear market (Businessweek’s “Death of Equities” magazine cover in 1979). For 2015, there may be some jockeying to see who can predict the lowest oil price.
Stopped clock – Predicting a major decline is the easiest way to sound like an expert on TV. The best part is that you’re never wrong, just early! Just like a stopped clock will eventually tell the right time, the pundit who cried wolf will be right at some point. The market will eventually go through a major decline. It takes no expertise to say this. What gets our attention and thus make the stopped clock prediction effective is these negative predictions appeal to one of our baser instincts…fear. The assets and screen time a pundit can grab is proportional to how outlandish the claim is and the speaker’s level of conviction. Warning there is a 7% correction on the way (like what happened this Fall) is met with a shrug of the shoulders by investors. Squawking that the Federal Reserve is destroying fiat currency and our economy as we know it might get you an hour on AM radio. The stopped clock pundit is like a baseball player who swings for the fences every time he’s up. They’ll eventually connect, but they whiff on far more pitches than they put in the stands.
Shotgun – Some big firms put out several predictions under different arms of their business. A firm might have their investment management division predict one thing, their chief economist predict another, their private client group put out a third forecast, and have their institutional arm say something completely different. The hope is that at least one of these entities will get close and the rest of the company can say they collectively made the right prediction without specifying it was really just one division out of four.
By now it should be clear that Wall Street’s best and brightest cannot predict where the markets are going over the next year. Reading their predictions may be interesting, but the annual ritual of forecasting has no value to investors. It is a vehicle by which investment firms seek to further their brand by getting consumers to identify them as an authority figure. Forecasting is for consumers, not investors. Consumers are being sold a product.
What do we think is going to happen in 2015? We can make a prediction like anyone else, but the honest answer is we don’t know with any degree of confidence, and we don’t want any investor’s long-term success to rely on anyone’s near-term predictions. We do have a crystal ball here at Fairway, but it’s collecting dust in an unused office. Investors can’t control what the market does, but they can control their reaction to it. A sound financial plan removes the need for market guesswork and trying to figure out what to “do” during this upcoming forecasting season.