Predicting the Unpredictable
We’ve heard quite a few questions from clients about why the market is doing so well right now. Many feel that the stock rebound is overdone, or that the run-up can’t possibly continue, or that other events could cause a retest of the March lows.
These are valid concerns, but unfortunately, there aren’t clear-cut answers for those who want certainty. When faced with uncertainty, it’s helpful to keep in mind the following points:
Point #1: Markets are Unpredictable in the Short Term
Markets aren’t the only thing that is unpredictable – just watch a sports event on television! The unpredictable seems to happen a lot, and humans’ ability to predict any short-term outcome is very limited.
In the short term, one should be prepared for a wide range of market outcomes. Yet, we are often surprised at what the markets do. Being surprised implies a level of confidence in our expectation that is probably misplaced. So, not only are markets unpredictable in the short term, we are also overconfident in our (or others’) ability to predict.
With investments, we try to keep a humble confidence about the long-term path of markets. History has shown time and again that market declines have been eventually repaired by rebounds, and the general direction of stock markets historically have risen, as long as underlying companies are profitable. The path is far from smooth and even. Unless you are needing funds within a couple of years, the short-term doesn’t matter, it’s the long-term that counts.
Point #2: Markets Predict the Economy
Bill Miller, the renowned value investor, made the observation – markets predict the economy rather than the economy predicting what would happen with the stock market. Economy data is historical, while markets are forward-looking. This explains why markets typically rebound before a recession ends, but it certainly doesn’t mean markets are always right.
Is it true today? Have markets correctly seen that the economic impact from the coronavirus will be less than thought in March? We just don’t know. But buying assets when they are attractively priced has been usually well-rewarded. And buying “on sale” removes the need to be correct about predictions.
Point #3: A Market is More Than an Index
The idea of “the market” is a tricky one. In the broadest sense, the market includes U.S. and foreign, large and small, growth and value, stocks and bonds. There are individual indexes for each of these categories, too, and the composition of each index changes over time.
Some parts of the market are doing quite well in the current work-from-home consumer environment. An example would be the S&P 500 index, which is dominated by companies that are internet-related, have strong balance sheets, have globally diversified revenue, or are defensive in nature. The S&P 500 also holds stocks of companies that are struggling this year, such as energy companies, banks and airlines. When will the current sentiment shift, making those current in-favor industries less prosperous? Again, there’s no way to predict.
The market is facing a wide range of possible economic outcomes with more uncertainty than usual, so the range of predictions is also wider than normal. In our opinion, market-timing is not possible, and trying to make short-term predictions is a fool’s errand. That’s why it’s so important to work with your planner to set your allocation in accordance with your goals & risk tolerance, and review/update periodically. We can’t predict what the future will look like, but together we’ll do everything we can to help you prepare!
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.
There are risks involved with investing, including loss of principal. The securities mentioned are for illustration purposes and are not a recommendation or an offer or solicitation to buy or sell any securities.
Written By Kimberly S. Baker, CFP®