Predicting the future is hard. We have all seen the limitations of statistical models and betting markets across many different areas in the past few years – from politics to sporting events – but the financial markets are one area in particular where predictions often feel like dart throws. To be sure, even well-aimed darts can sometimes miss their target, as a great article from Charlie Bilello at Pension Partners illustrated last week. In short, his note discusses the very depressing recent forecast for stocks and bonds by the renowned asset manager GMO, which expects a negative 2.2% per year from U.S. large caps and just 1.9% per year from U.S. bonds over the next seven years. Based on that dreary outlook, we might as well all just throw our money into cash and go hide under the bed until 2025! The problem, however, is that seven years ago, GMO had a very similar forecast for the financial markets – a paltry 2.7% from U.S. large cap stocks and 2.8% from bonds – and yet that ended up being quite far from the mark in the case of the stock market. In actuality, U.S. large caps returned 13.2% per year (10.5% above their forecast), and U.S small caps returned 12.0% instead of the 0.1% that GMO expected. Whoops!
The point is not to pick on GMO, which undoubtedly employs people smarter than me to make these calls, but we believe trying to predict what the financial markets are going to do over an extended period of time is a futile exercise in the first place. There are just too many variables that factor into the global economic machine to have any expectation of precision, so we’d rather follow the overall trend and adjust as needed as new information arrives instead of relying on sophisticated models built on a number of assumptions and averages. These types of forecasts generally compare the current state of the market to some “normal average” environment and then expect investors to make rational, math-based decisions. Yet, the issue is that stock market environments are rarely “normal” and “average,” and investors are rarely, if ever, rational. It also ignores the fact that people (and, more importantly, institutions) typically invest based on what they need out of the market, not what experts say they can get out of the market. Pensions, for instance, are perhaps the dominant investor in today’s marketplace, and they are still targeting returns in the realm of 7-7.5% per year, on average, to make up for what is too often an already underfunded plan. There is absolutely no way they have any hope of achieving that target without investing heavily in the stock market, which has helped keep demand high regardless of the limited expectations (not to mention many individuals have little hope of retiring without strong performance out of stocks).
Keep in mind, too, that while there are many good-intentioned analysts and strategists making market calls (like GMO), there are also those who create the illusion of expertly predicting the future of world markets when really they just enjoy being pessimistic contrarians. They would rather be right while everyone else is wrong than actually make money in the markets, yet many of them have no problem making money for themselves by scaring people into subscribing to their newsletters or investing in their fund. Fear sells; boring bullish arguments don’t, and these perma-bears are very well aware of that fact. We spend a great deal of our time responding to their frightening predictions when asked about them by our clients and have done so regularly during the entirety of this bull market. They never go away because the potential concerns never go away. As we often tell our audiences during presentations, “If you’re waiting for all the risks to go away, you’re never going to own stocks again,” and, paradoxically, the real time to worry is probably when there appears to be little to worry about. It’s the snake you don’t see that usually bites you, not the snake that has a thousand scary articles written about it. And we think it’s safe to say that there remains plenty to worry about at the moment based on the prevailing sense of unease afflicting the market.
Despite the concerns, though, the S&P 500 continues to climb the wall of worry, breaking out yesterday to its highest point since February 1. The NASDAQ is back to new all-time highs, as well, and the Value Line Geometric Index (roughly the median stock in the market) is only about 1.50% from its all-time high. This latter point is important for anyone who still believes it’s only the FAANG stocks lifting the market. Obviously when the largest stocks in cap-weighted indices are doing well, it’s going to exaggerate the returns of those indices, but, to repeat, this is NOT a narrow market where only a handful of companies are rising.
And with that, here are the Charts of the Week…
