Hi and Happy New Year:
I wanted to start the year off with my first Quarterly Client email. Please let me know what you think and if there are topics, you’d like for me to discuss in future emails. And, please feel free to share with anyone whom you think will enjoy this email.
When prophecies fail… I mean… when economic and market forecasting fail.
The dangers of forecasting: "It's tough to make predictions, especially about the future." - Yogi Berra
It’s human nature to want to know the future. We could argue that fortune telling is one of the oldest desires of humans. (Just a guess here.) So, it’s not surprising that people want to know what will happen next in the market and with their money.
Forecasting of any kind is hard. Vegas bookies? Meteorologists? Political Pundits? Economist? For example, Meteorologists are the butt of many a joke. No matter where you are the joke revolves around the same thing… their (in)ability to predict the weather. Oddly enough they are aware of this too. In fact, most weather forecasters will admit they are most accurate 1-2 days in advance with an exponential decrease in accuracy as they go out. (Anything past 8 days isn’t a forecast it’s just showing historical averages/probabilities.) Look into the history of chaos theory if you are interested in this concept.
**See this article on Chaos Theory: https://www.investopedia.com/terms/c/chaostheory.aspEconomic and financial forecasting is in the same boat. It must be taken with a grain of salt and a heavy dose of skepticism(?), temperance(?), humor(?). At the end of 2022, there was a consensus that a recession would start some time in 2023. It didn’t. Furthermore, on more than one occasion in 2023, the Fed Funds Futures Market predicted the fed would cut interest rates in 2023. Not only did this not happen, but the Fed also actually raised rates when the future markets had predicted a cut a few months before.
**See this article from Axios: Why everyone was so wrong about the 2023 economy (axios.com)I don’t know the odds, but I’d wager most forecasters are wrong… a lot. If they weren’t, that person(s) would have a monopoly on all asset management because we would all give our money to them. Let’s face it. Forecasting isn’t a science. 2+2 doesn’t equal 4 in economic forecasting. Just look at 2023. It’s a high stakes game of horseshoes and …. Just get close enough. (Right?) Let’s just hope they’re holding horseshoes and not...
The S&P 500 ended up well over 20% for 2023 which no one expected … said another way… no one predicted it.
You’ve heard me say before, there is a paradox to being an investor. Data is backwards looking, the markets are forward looking, and we live in the now. We take information yesterday and filter it through our reality of today to invest towards our tomorrow.
This paradox can be maddening. In fact, our emotions amplify this madness. Throw in your personal situation or your political views or a recent geo-political event, and all this madness gets a shot full of jet fuel… in our minds.
This is why I build our portfolios based on objectives grounded by your goals and when you need the majority of your funds -- not on (y)our feelings. (Yes, I do have feelings. I am not a robot.) As you know, I don’t give (nor believe in) risk tolerance questionnaires because depending on the day our feelings change the results of the quiz. Measurable objectives/goals and time are a better compass for portfolio construction than our feelings.
(Yes, there may be some tactical changes at the micro level from time to time, but the macro allocations are best with a long-term investment perspective.)
So, as we start off 2024, an election year, I just want to remind us that 24/7 news, social media, cable TV (do people still have Cable TV?), etc. is not reality. This year will be chaotic, and there will be moments where we want to run for the hills. When you hear so-and-so pundit on your (fill in the blank favorite news source) tell you how bad the world will be if the wrong political party wins, just remember 2023, 2021, 2020, 2009 - 2020, and so on were not what most people expected. I could give 100 years of data… what is happening on the news, socially, politically, etc. does not necessarily correlate to the investment markets.
Outliers happen. 2022 was a brutally hard year in investments of any kind. But statistically speaking, we win more often than we lose and winning is always better than losing. We just have to play the game (consistently) and our game is investing.
2024 will test our emotions, AGAIN: “Discipline is the only way to ensure your investing habits aren’t gambling habits.” -- Michael Hanson
Emotions are powerful and valid (some of the time.) Emotions are the devil’s snare when it comes to long term investing, and being irrational about investing is always detrimental. Balance is key.
**See Attached: First Trust Client Resource Kit: Markets In Perspective – Page 7 – Missing The Best Days In The MarketsJust remember:
If you are planning a life for yourself and your family full of hope, happiness, and dreams, then we ought to invest like there is hope for tomorrow. When you call me and tell me that you’re moving into your doomsday bunker, then we will invest like that. Too often people want to invest for doomsday and live like there’s hope. Our investing should always match our real outlook on life. Hopeful.The last several years have been emotionally draining on all levels – COVID, lock downs, elections, wars, inflation, raising interest rates, more wars, more elections, a once in a generation sell off in equities and bonds, exhaustion from recession predictions, and the list goes on.
(I won’t rant about our 2024 election. Just remember the markets care less about elections than we do individually. Maybe in another newsletter, I’ll run through my stats of elections and the markets.)
The biggest risk to investing based on emotions, economic, political forecasts etc. is to believe you know what WILL happen. What I have learned in almost two decades of Wealth Management is that emotions and forecasts are rarely accurate predictors of the future.
As we gear up for the complete inundations of explanations as to why 2023 forecasts didn’t work and what 2024 expectations are, we ought to pause and ask a few questions to balance how we feel about the world around us and our investment stamina?
1. What if I’m wrong about my expectations of …?
What are the implications if I am wrong?
2. Tomorrow will be different from today but to what extent will my outlook be right, wrong, or indifferent?
3. What are the odds that this forecast changes my long-term investment goals.
Literally give it a percentage. 5%, 10%, 85%?
4. What are the odds of my finances, employment, health, changing because of “x” expectation — geopolitical, economically, etc.
So what’s Brian watching this year?“When the facts change, I change my mind. What do you do?” – unknown possibly John Maynard Keynes (?)
Wells Fargo Investment Institute (WFII) is still predicting a recession 2024. (This is the minority view now.) I’m not sure that I have the same sincerity in that conviction. Historically speaking, recessions on average start around 7-8 quarters from the start of the Fed tightening interest rates. Q4 was 7 quarters. Some areas of the economy are weakening but others seem to be strengthening. A recession isn’t off the table, but I also don’t think it’s the centerpiece.
I am concerned about the Russia/Ukraine war turning in Russia’s favor and then becoming a NATO event. I’m concerned about the Israel/Hamas war going regional and drawing the US in. I’m concerned about the Taiwan elections and China’s desire to take Taiwan back by coercion or force. I am concerned about the US election and the potential chaos around it. I am concerned that a recession could still happen. I am concerned that there is an unknown event that could happen.
**See Attached: First Trust Client Resource Kit: Markets In Perspective – Page 2 – Crisis and EventsThere is always something to be concerned about. But this is why we define our investment goals. We’ll remain vigilant and fully invested. Holding 6-12 months in cash or cash equivalents makes sense. (Let me know if you want money markets or CDs, my rates typically beat banking accounts.)
History (not forecasting) tells us that the stock market is positive roughly 70% of the time. As the axiom goes, “it’s time in the market not timing the market” that is worth investing by. I’ll continue to monitor, research, and advise on the pieces of information that I believe impact our portfolios the most -- the differences between forecasts and verifiable data to change portfolios.
**See Attached: First Trust Client Resource Kit: Markets In Perspective – Page 7 – S&P 500 Index: Positive and Negative Years Here’s to a happy, healthy, proposes 2024.
Next time… let’s get into elections?