“History doesn't repeat itself but it often rhymes”  Mark Twain

 

On Forecasting

 

“all 12-month predictions come with a large standard error.”  Jeremy Siegel, author of stocks for the long run”

 

Last year the forecasts were almost unanimously predicting that the inverted yield curve* guaranteed a recession.  I had my doubts.  Not that I thought I knew more than the learned and famous economists.  I simply thought that one indicator, the inverted yield curve, (an extremely reliable indicator) is not enough to come to a conclusion.  There were numerous other indicators (that were being ignored) that did not forecast a recession.   History didn’t repeat itself.  You and I, as investors, were correct to ignore the warnings of the forecasters.

I was looking at a piece of research last week that brought back memories of the late 1990’s and the 2000’s. Most of the time over 50% of the stocks in the S&P 500 perform better than the index.  In 1998 and 1999 only about 30% of the stocks in the S&P 500 did as well as the S&P 500 itself.  This happened again in 2023 and 2024.  It has happened again because, just like the late 1990’s, a few stocks in the S&P 500 have become extremely expensive relative to their earnings.  Last time this happened the S&P 500 did poorly for the next three years while two thirds of the stocks in the S&P 500 did better than the index.  The expensive stocks did very poorly and brought the index down.  Managers who had avoided the expensive stocks did very well in the early 2000’s.  Will this happen again?  No one knows for sure.  I’m just glad that although I don’t try to predict outcomes I do prepare for them.  The investments I recommend, and that I own myself, are not the expensive headline stocks.

This year is no different than any other for me to make predictions.  I don’t make them.  I just prepare for the unknown.  In this case it means avoiding expensive stocks that are making headlines. A rotation into undervalued sectors and regions may happen this year, but no one knows when a rotation will occur.   

Perhaps the most important risk is investor behavior.  One of the costs that investors bear is trying to time investing.  When prices go up, they get excited and want to invest. When prices go down, they get fearful and want to get out. The return that those investors get is the product of two variables.  One is the underlying return of the investments.  The second one is the timing of when they get into those investments, or when they're shaken out of them.   

A second risk to consider is the inevitability of corrections and the inevitability of shocks in the system. The market, on average, has a 20 percent dip every three years. It's just an unpleasant but inevitable part of investing. Mentally prepare for those corrections.

A third risk is not being able to disregard short-term forecasts. Yes.  You can't avoid hearing strategists proclaiming the market is going to go down without hearing other strategists proclaiming it's a great time to get in.

Reacting to short-term forecasts about interest rates, about monetary policy, about politics is a  very dangerous thing. These are all important questions, but they are unknowable. So you have to prepare, but you can't predict the outcome.  And I think maybe the most important thing is to try to have the discipline to invest relentlessly.  Since I became an investment advisor in 1982 the S&P 500 has grown by 132 fold with dividends reinvested.  There was no need for patient investors to make short term predictions.  

 

Investors need to maintain courage and fortitude to stick with their investment plan.  The truth is, if you look at the data, whether you get in at the high of the year or the low of the year, whether you just get in at the beginning of each year, over time, those differences are relatively modest compared to how much it matters that you got in. So the key is to have the courage and the fortitude to stick with it when those inevitable declines and panics to stick with your long-term plan.

 

 

 

 

*An inverted yield curve is when short term interest rates are higher than long term rates.  It normally occurs when central banks are attempting to slow the economy by increasing the short term interest rates.