Don’t indulge in seasonal speculation

Have you read any ‘2020 outlooks’ yet? There is something about the turn of the calendar year that brings out the thumb-suckers in the media, as sage reflection on the year just past gives way to blue-sky speculation about the coming 12 months.

To be sure, there is an economic element in this. Newsrooms tend to thin out over the holiday season as staff are told to clear accumulated leave. Media outlets stockpile think-piece fodder from bankers and brokers to fill the gaps between the adverts for a few weeks. End-of-year specials are a popular go-to feature.

This is why you are confronted with clickbait headlines at this time of year, like, “Ten Big Economic Surprises for 2020” or “Five Stocks You Can Count on in the Coming Year”, or “Your Armageddon Portfolio: Bunker Down with these Shares”.

There were plenty of these types of headlines around Christmas 2018 following the global equity markets’ worst calendar year performance in seven years. The US-China trade war was heating up, the Brexit saga was roiling markets and there was mounting evidence of a significant global economic slowdown in the pipeline.

So, on New Year’s Eve 2018, CNN pitched in with a guest economist’s column titled “How Populism will Cause a Crisis in Markets in 2019”. The argument was that the simplistic solutions enacted by politicians to the post global financial crisis stagnation would come home to roost in the coming year.

The analysis appeared sound, but a year on and we’re still waiting for the promised reality check. Equity markets have experienced double-digit gains in 2019. The US market has broken records and is up more than 20%. Against most expectations a year ago, bond markets have had another very solid year.

To be fair, expectations that 2019 would mark a brutal reckoning for markets were widely held. In December 2018, a survey by Natixis Investment Managers said two thirds of institutional investors believed the US bull market would come to an end in the coming year.

The biggest threats cited were geopolitical disruptions, such as Brexit and trade wars, while rising interest rates were also seen as posing a significant risk.

A year later, those issues grind on. Markets vacillate according to every tweet from Donald Trump, though the UK election has taken some of the wind out of the Brexit issue. As for interest rates, they have spent most of the year falling, not rising.

The growth slowdown also triggered a wave of downgrades by major brokerages and banks in late 2018. Barclays won headlines when it lowered its year-end target for the S&P-500 to 2750 from 3000, citing bearish retail investor sentiment and slowing growth outside the US. Actually, they got it right the first time and should have stuck to the original call because the index was above 3100 going into December, or about 25% higher over the year.

Every year, you see these calls go awry, perhaps none so spectacularly as the headline-grabbing line from the Royal Bank of Scotland in early 2016, telling clients in a research note to “sell everything” in anticipation of a “cataclysmic” year in markets.

“Sell everything except high quality bonds”, the bank told clients. “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”

That advice cost any investors who followed it dearly, because global equity markets delivered a return of about 8% that year in US dollar terms. In fact, the total return of equity markets from early 2016 to late 2019, as measured by the MSCI All Country World Index, was more than 40%.

The truth is, everyone can have an opinion about the market outlook, but that’s all they are – opinions. And the problem with writing economic commentary on the run is you are always responding to news. Within a day of writing it, it’s usually out of date.

To be clear, there is still a case for economic analysis. The problem arises when you try to connect long-term analysis to short-term speculation about market direction. Markets respond to news based on the collective expectations of millions of participants, or put simply, all those opinions are already reflected in prices.

In any case, an economic or market forecast is inevitably based on a bunch of underlying assumptions, any one of which can be thrown awry by events. Nothing really is constant, which is why forecasting is such a tough and unforgiving business.

The media’s need for big market calls that attract our attention is easy to understand. We’re naturally drawn to the idea that someone out there can see the future clearly. The reality, unfortunately, is that no-one can. Everyone is guessing.

Years of studying such feeble guesswork led to Carbon’s 6th and penultimate investment principle: “forecasting is folly”. Maybe we should rewrite it for the festive season – “forget forecasting: concentrate on holly”.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

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