Market Commentary: Winter 2021 - Market Forecasts

‘Tis the season for the world of investment professionals to make predictions for the coming year. Inflation, COVID, political division, and national debt will dominate headlines, and pundits will set targets for the S&P 500 index. Other favorite topics will be the direction of the price of oil, Bitcoin, gold, and top stock picks for the year – Barron’s is announcing that Amazon, AT&T, and Berkshire Hathaway will be their market-beating bets for 2022. Enough. To us, these predictions have little value as they are rarely correct. For example, how did Barron’s do last year – in 2021? Their stock picks averaged 27%. The S&P 500 returned 28%. In other words, their top ten picks (the ones that were supposed to do the best) performed a little worse than a diversified index. In 2020, Barron's top stock picks averaged 10% while the S&P 500 returned 19%. Pretty darn bad. Of course, in their defense, they said, “who could have predicted 2020?"  Fair enough – 2020 was, in many ways, an exceptional year. The onset of COVID was a surprise to everyone. No stock picker or market observer (that we are aware of at least) forecast that global calamity, and, in all fairness, how could they?

Known Knowns, Known Unknowns, and...

And that is the point. It is very difficult to predict the future, even in the best years when nothing terribly shocking or surprising happens. Economists, investment professionals, and the financial media build their forecasts on what they know about the world around us. It is based on current news and trends and can be scrupulously reasoned and analyzed. Nevertheless, it is consistently a fruitless task – especially over the long run. From time to time, a few can get these forecasts right, but to get predictions right consistently over five, ten, twenty, or more years is a near impossibility. Life and markets are too complex, and the “unknown unknowns” are just that.

The Exception Proves the Rule

One famous example is that of Nouriel Roubini, an economist who was one of the few to forecast the collapse of the US housing market in 2008. He predicted the extent of the meltdown and became a near household name because of it. The problem is that even though he was spectacularly right on this one, he went on to predict time and time again, as the markets and the economy recovered in the years following the collapse, that there would be a follow-up crisis and that more extreme crashes were inevitable. His calls, after his initial pronouncement, were consistently wrong. Indeed, if you had listened to him, and many investors did, you would have missed the longest bull market run in US market history. This highlights how, while a correct prediction can be made, it is nearly impossible to find even one person who can do it on a consistent basis. And how do you discern whose voice, amongst the many competing voices, is the correct one? At any given time, there are those who predict the future will be bright, others who think collapse is imminent. And most of the time, it is not until an event has happened does it become clear who was right. Hindsight makes everything look clear. The financial news media compounds this by focusing on certain hot topics or trends. And often, it is the more extreme trends they promote that grab our attention. It can add to a sense of anxiety about the future and cause us to doubt our beliefs and question our own discipline. Many times, those who are promoting a given narrative are merely doing so to support their own investment product or service. Good advice and guidance can be hard to find when it is a veil for selling a product.

Who Wants to be a Millionaire?

This is precisely why we stick to our time-tested, academically endorsed, and diversified approach - although this strategy is not expected to provide the excitement and short-term outperformance of any particular market, sector, or stock that is "trending” at any given time. A diversified portfolio’s returns will always represent a weighted average of its various investments. Diversified investing is a bit like applying a Goldilocks principle: not too hot, not too cold, perfect for the long-term investor who wants to sleep at night. This approach is certainly less glamorous than making bold market bets, and you may have even heard somewhere that you’ll never get rich with a diversified approach. We disagree. We see far more millionaires come into our office using a diversified approach than those who don’t. That trend – one sector doing well and another doing poorly – can sometimes continue for years. For example, between 2000 and 2010, the best-performing assets were emerging market stocks; the worst-performing were US stocks. Market commentators at the start of 2011 were telling investors to pile into emerging markets – because that is where the growth was going to be. And what was the best returning sector from 2010 to 2021? The US stock market. And the worst? Emerging markets. Now, things do not always happen with such clockwork regularity, but it does show that trends can go on for some time. The challenge is that one does not know when one trend will boom and the other bust. As a result, when asked what we see in the future of the markets, we will usually answer that they will do just fine and perform close to historical averages over the long term. Don't expect us to make any predictions of where the S&P 500 Index will be in one year’s time or where interest rates will go. However, we do have opinions on economic and financial topics, and we do track the news and the trends closely and have a sense of where we think things may go, but we are not going to change our strategy or our discipline because of it. Time and time again, it has proven to be the right course of action, and we are all more financially stable and less stressed out for it.