The Problem With Market Forecasts

In a recent note, titled, Nobody Knows Anything, Nick Murray provides a list of some of the major, unknowable market events that have occurred since 2020.  The pandemic, the three month economic contraction, the inflation spike, the Fed tightening, and the stock market rally of 2023 just to name a few. 

The key point, however, is neatly summarized in the note’s final paragraph:

"Nobody knows anything. The foregoing litany of unknowables confirms pretty conclusively that the economy can’t be consistently forecast, nor the market consistently timed. That realization, in turn, suggests that the best time to add to your long-term, diversified, high-quality equity portfolio may just be whenever you have the money. And the best time to withdraw/sell may just be whenever you need the money.  

That may be all you can know. Consider the possibility that it may also be all you need to know."

Everyday millions of words are spoken and written about the stock market. Some experts predict things will go up and some predict things will go down.  Similarly, the experts that are right in one period are often wrong the next.  A good example of this is the case of Morgan Stanley’s Chief Equity Strategist, Michael Wilson.  At the start of 2022 he forecasted a very bad year, and he was correct.  The media praised him as a genius and gladly reprinted his warnings when he announced another bear case for 2023.   

Unfortunately, this time he was very wrong, the market went significantly higher and when the S&P 500 recently hit 4,550, he admitted he was wrong.  Of course he also had to admit he was wrong in 2019 and various other years along the way but that’s showbiz, baby.  You make educated guesses and hope for the best. 

How We Use Market Forecasts 
When we manage portfolios, we leverage Blackrock’s economic forecasts that may cause us to tilt the allocation in one direction or another with the goal of staying plus or minus 300 basis points of our static benchmark. See the “Changes to Holdings” section of our July rebalance for the non-tax aware models as an example. 

In any given period, we may tilt towards value, incrementally reduce exposure to one sector in favor of another or shave some large cap weighting and reallocate to small (always keeping the tax implications for the specific client and account type in mind.)  What we never do, however, is pretend we can correctly predict exactly when the market will go up or down.  We therefore always stay fully invested with enough safe money set aside for investors to feel comfortable riding out a downturn.  

Finally, I don’t know how many investors remained out of the market on the strength of Mr. Wilson’s forecasts, and the media’s constant repetition thereof, but I suspect it is thousands of investors and billions of dollars.  These unfortunate souls are now presumably waiting anxiously for “the correction.”  This is how it always is, and for those relying on market forecasts, how it always will be.  

As always, if you have questions about this or anything else, please don’t hesitate to use this link to schedule a quick conversation.