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What Will the Market Do Next?

What Will the Market Do Next?

April 10, 2023

Navigating Market Speculation: Separating Fact from Fiction

    If you are like me, you are hearing a lot of speculation about the markets these days. Will the Fed raise rates again, or pause, or cut? Will more banks fail? If more banks fail, will it affect my local bank? If so, how? Will we have a recession, when, and how bad will it be?

    Remember that the financial “news” business (radio, TV, newsletters, magazines) is really the financial pornography business. They are in the business of providing titillating and exciting and interesting content that keeps people interested, so they can see and hear the commercial messages. So, consume “financial news” with caution and only in moderation.

    But, it is understandable that you would like to know what the markets will do next.

    Improving Predictions: Lessons from Weather Forecasting

      You might have noticed that weather forecasts are better than they have ever been. Three-day forecasts today are as good as 36-hour forecasts were in the 1980s, and the average error in hurricane-tracking predictions has been slashed by two-thirds since the early 1970s.

      This improvement results from computer models that collect all the data—temperatures, clouds, and winds—and put it into mathematical equations. These models were built by looking for and

      identifying variables that offered some predictive value. Over time, as more of these factors were

      identified and fed into the model, the accuracy of the forecast improved.

      We have been attempting to do the same thing with the stock market. We have spent endless amounts of time, money, and human capital trying to identify variables that help predict market behavior. We have looked at the ridiculous (Super Bowl winners) and the more serious (past performance). Still, none of them have much predictive value, particularly over the short term.

      But that doesn’t stop us from looking, which often leads to guessing. And guessing is no way to make investment decisions.

      The Fallacy of Market Prediction: Investing Beyond Guesswork

        The pioneering investor Ben Graham is said to have described the market as being hard to predict: “In the short run, the stock market behaves like a voting machine, but in the long term, it acts like a weighing machine.”

        And because humans are doing the voting, it’s very difficult to predict which way the vote will go. Another reason is that investing is not a physical science.

        It’s not like gravity or even the weather. It doesn’t follow set laws. On any given day, the stock

        market represents the collective feelings of all of us. More often than not, those feelings are based on fear or greed. And it is only in hindsight that we recognize our mistakes.

        So while on one level, human behavior seems predictable (e.g., we get excited and buy stocks when they are flying high; we get scared and sell when stocks decline), it’s awfully hard to know what we’re doing until it’s too late.

        I mention all this to explain why I don’t like to get sucked into the trap of trying to predict markets. I consider it a fool’s game. There is no proven, market-predicting model hidden in a computer that only a few people have access to.

        The facts of investing success remained the same. Over time (think 10, 15, or 20 years), stocks typically do better than bonds, and bonds typically do better than cash. Low expenses are typically a good sign of future relative performance. We also know that a diversified portfolio will help protect you from the variability of the stock market.

        Beyond that, it’s just a guessing game. Anybody who tells you they KNOW what’s coming next is wrong. And the more certain they are, the more concerned you should be.

        So, let’s stop pretending we can predict the markets. Let’s prepare for the inevitable surprises that always come along.

        If you would like to talk about your investment goals and how to prepare your investment accounts to be more ready for the next surprise, I would love to talk with you. Just follow this LINK to find a time that works for you.

        Yes, I’m a CERTIFIED FINANCIAL PLANNER™ professional, I’m always a fiduciary advocate for my clients and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

        I look forward to getting to know you.

        If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.