Investor Minute
When the Economic Pros Get It Spectacularly Wrong
How often have you seen this scenario in a big football game? With less than a minute on the clock, the team trailing by a point or two gets the ball deep in their own territory. Their final drive down the field gets stalled and they face fourth and long, well out of field goal range. All the opposing team has to do is limit their opponents to a few yards and they’ve won the game.
But that’s not what happens. Somehow there’s a miscue and the driving team’s star receiver gets wide open. He makes an easy catch for a big gain, setting up his team to win on an easy field goal.
In the losing team’s somber press conference, the head coach explains that on that pivotal play the defensive strategy his team used was entirely appropriate for what the offense was showing. At that moment some of the most brilliant minds in football made the logical call and got it very wrong.
Of course, on Monday morning, even a casual fan can look at the game tape and identify what the defense should have done.
It happens in football. It happens in the financial world.
In early 2023, after a dismal year for the stock market in 2022, Bloomberg polled 44 economists about the prospects for the coming year. More than 90% of them said to expect a recession. They weren’t alone in this opinion. Stock market pundits and corporate executives were saying the same thing to the financial media.
A year later, it’s evident they were wrong. In fact, says Bloomberg, the exact opposite happened. Unemployment is reported to be near a half-century low, consumers have not cut back on spending, and demand for residential real estate still remains high despite higher mortgage interest rates.
But while stocks have outperformed the pundits’ predictions, other investments have not. In a roundup of how the experts got it wrong, Bloomberg profiled ten sure-fire alternatives to stocks that failed to live up to expectations. These include long-term bonds, cash, hedge funds focused on startups, and SPACs (special purpose acquisition companies).
In each case, past performance and “reliable” economic indicators mislead the experts. Much like what happened to our losing football team.
The whole point in reviewing these forecasting failures isn’t to gloat when eminent economists and highly paid pundits are spectacularly wrong. It’s to remember that the future is almost always a surprise.
New and unknowable information is what moves future stock and bond prices. So prudent investors should avoid basing current investing decisions on what everybody says is sure to happen next.
Bloomberg put it nicely. “Investors who listened too closely (to the predictions) could have made a costly mistake, missing out on a technology stock rebound and a 24% gain in the S&P 500 index in 2023.”
If you have questions about how your investments are allocated to account for future market uncertainty, talk with your trusted advisor.
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