At this time of year, our inboxes are inundated with predictions for the year ahead. These will generally come in two forms, an economic outlook, and a market outlook.
This year, we thought we would provide a summary of our thoughts on what we have read, and, in summary, what we conclude is that nobody really knows and nobody really ever knows.
Jumping back to this time last year, we cannot find any economic outlooks that suggest an escalation in the Middle East and subsequent disruption to supply chains in the Red Sea, the majority suggests a recession in at least one of the major economies across the world and there are a wider array of predictions around what inflation would do and subsequently what central banks would do to interest rates (admittedly at least one of these must have been close in the end).
What about the biggest banks on Wall Street? At the start of 2023 Barclays, Morgan Stanley, UBS, Citi, and BlackRock all made their predictions for how the S&P 500 would end the year. Barclays ended up being the most pessimistic guessing 3,675, BlackRock guessed at 3,930 and the other three were somewhere in between. We now know that the S&P finished at 4,769, over 20% ahead of the most optimistic of those five significant banks predictions.
In December 2021, 400 PhDs at the Federal Reserve (US Central Bank) predicted interest rates would be around 1.75% in 2023. Fast forward and we now know that they finished the year at 5.5%. Over three times the predicted rates so even some of the brightest minds in the world fail to accurately predict how markets could go.
Another key ‘predictor’ that analysts have referred to over the years is the ‘January Effect’. That is the market “theory” that suggests that a positive January in markets results in a positive year and vice versa. In fact, this had played out only 17 times in the last 30 years (1) in the FTSE100. That is just over half the time so almost the same odds of a coin toss.
So as you can see economists, Wall Streets finest and even the Central bank fail to successfully predict where markets may end up. This is combined with market ‘theories’ such as the January Effect also showing little evidence of success.
Instead, we can work on facts. In the last 20 years, 15 of these years have seen positive returns in Global Equity Markets (2). In fact, going back all the way to 1979 the US Market (3) has only seen 8 years of negative returns.
This leads to the summary that a successful investor is best trying to block out much of the noise. Investing in a well-diversified, low-cost, global strategy and blocking out what any economist or market predictor tries to tell you provides you with statistically the best opportunity for success.
Investing successfully is not about trying to find a needle in a haystack, nor is it wholly about buying the full haystack but instead it is a matter of buying the haystack with the intention of holding it over the long-term, even when a ‘hay expert’ is convinced that the price of hay will fall in the next 12 months.
Footnotes
(1) Professional Adviser – Pop quiz: What links markets, Julius Caesar and Pope Gregory XIII? (professionaladviser.com)
(2) Global Equities markets back to 2003 measured by MSCI World Index
(3) US Market back to 1979 measured by the Russell 3000 Index
