In his first piece of 2021, Jason Zweig, the “Intelligent Investor” columnist for the Wall Street Journal (WSJ 1/9/21), offered the following hypothetical:
“Imagine that it’s Jan. 1, 2020, and you have a magic crystal ball. It tells you that coronavirus will spread like wildfire, killing nearly 2 million people worldwide and putting the global economy into an unprecedented coma for months. Now imagine that you are the only person alive who knows that and you get to make one trade on the basis of that information. What would you do?”
Zweig concedes, as virtually all of us would, that given those circumstances, he would have expected stock values to decline. As Zweig puts it, “We … know you would have shorted, or bet against, stocks. Who wouldn’t have?”
And yet, the stock market recovered surprisingly (in many cases, stunningly) well after bottoming out in late March. The S&P 500 ended the year up 16.3%; the Dow rose by 7.3%; NASDAQ, predominantly composed of tech companies, rose a whopping 43.6%. And the Vanguard U.S. Stock Index Fund, which represents all of the public traded companies in the U.S., rose 21%. The stock indices are at or near all-time highs.
So much for 2020. What does that mean for 2021?
By now, you can probably guess our answer: we don’t know.
But it may surprise you that PPA’s perspective – that we can’t know the future and so shouldn’t hazard guesses about it – remains something of an outlier in the financial industry.
As December turns to January, Wall Street firms renew their annual ritual of forecasting the year ahead — summoning data, explaining trends, issuing warnings. “These prognosticators are smart people and often have interesting things to say about what has already occurred in the markets and the economy,” writes Jeff Sommer in his recent New York Times column, “Your Guess Is as Good as Mine, or Theirs” (NYT 12/20/20, page BU5). “But as far as predicting the future goes, Wall Street’s record is remarkable for its ineptitude.”
As compiled by Bloomberg and reported by Sommer, around this time last year, “the median consensus on Wall Street was that the S&P 500 would rise 2.7 percent in the 2020 calendar year.” That, of course, turned out to be dramatically low. A few months later, in April 2020, as the coronavirus stopped the global economy in its tracks, forecasters hit reset and issued another set of predictions. Per Sommer: “They said the market would fall 11 percent. But the market had begun climbing on March 23, the day the Fed intervened to stem panic. The strategists failed to register the change in direction. If you had invested, based on their predictions, you would have missed a great bull market.”
Woefully inaccurate predictions by Wall Street’s prognostication factory aren’t limited to 2020. According to Sommer’s own research, this kind of inaccuracy has been the norm for the past two decades! Sommer reviewed the median annual stock predictions made by Wall Street analysts each December, dating back to 2000. He found that “the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points…”
For his part, Zweig, the Wall Street Journal columnist, reached a strikingly similar conclusion, writing that “analysts’ earnings forecasts, and investment strategists’ predictions of market returns, turn out to be wrong every year,” (italics in original). Zweig, reflecting on the extraordinary turbulence of last year, notes, “[t]o me, the lesson of 2020 isn’t that a giant, unpredictable ‘black swan’ can wreak havoc with the best forecasts. Instead, the lesson is that whatever seems most obvious is least likely to happen.” Zweig continues: “the only incontrovertible evidence that the past offers about the financial markets is that they will surprise us in the future. The corollary to this historical law is that the future will most brutally surprise those who are the most certain they understand it.”
What then do we recommend?
First, review your portfolio to ensure that your asset allocation remains consistent with your goals, risk tolerance, and time horizon. If they’re aligned, stay the course. If they’re not – or if you fear they may not be – we can help you make thoughtful, deliberate modifications.
Second, insofar as you’re able, ignore the day-to-day pandemonium and re-allocate that time to the people and activities you most enjoy. That will give you a far better return on investment of your most valuable asset: time.
Welcome to 2021!