DAVID LAFFERTY, CFA®
Senior Vice President and Chief Market Strategist
Natixis Investment Managers — U.S. Distribution
It’s that time of year again, when everyone releases their year-end investment outlooks and predictions. In fact, the only thing that will show up in your inbox more frequently than investment outlooks will be articles and blogs about how you can safely ignore them. The complaints you’ll often hear are that markets are unpredictable and nothing destroys portfolio assets faster than a bunch of guesses from know-nothing market pundits. Whether this is a well-meaning warning or just a chance to sound snarky and contrarian, an entire cottage industry has developed to protect investors from the evils of annual market outlooks. As a producer of such commentary, I have mixed feelings on the subject. With that in mind, let me make the case for what I see as the pros and cons of market outlooks and investment predictions.
Let’s start with the downside: Pure market predictions are pretty useless. These are usually declarative sentences, or worse, point estimates, that ooze with certainty. But guesses dressed up with confident language are still guesses. Typical examples of this might be “Double-digit returns for stocks!” or “Gold to finish YE 2018 at $2000/oz.” Point estimates give an air of authority but fundamentally miss the point. In my view, all good predictions are probabilistic, because outside of math and physics, little is known with certainty. Be wary of statements asserting that something either will or won’t happen. [Caveat: We fully understand why investors and the financial media crave the appearance of certainty. We inevitably fall into this trap from time to time as well.] However, we believe the best forecasts acknowledge uncertainty and are tempered by probabilities. Some things may be more or less likely to happen, but nothing is guaranteed.
Beyond the Headlines
Now for the upside: The most valuable element of an investment outlook is the rationale for the opinion. I don’t care what you think, I care why you think it. All forward-looking commentary provides an opportunity to evaluate the author’s rationale relative to your own understanding of market circumstances and dynamics. Is it logical? Is the fact pattern consistent? Is the view already priced in? Does the view follow from the argument presented? The real insight for investors lies in the author’s reasoning, not in their shrill predictions.
When I write our equity commentary in a few days, I will argue that equity returns will be limited by valuation – essentially that stocks are too pricey to go up a lot. (I argued the same last year and stocks are up far more YTD than I predicted.) I have no idea if that means +3%, +5%, or +7%. Our business doesn’t lend itself to this level of precision. Again, beware of point estimates. I would expect readers to assess our rationale and the quality of the argument presented. Are stocks expensive? What metrics/data support this view? Does it necessarily follow that higher valuations will limit future returns? Does valuation even matter?
If Not Science, Then What?
So if outlook prognostications are an inexact science, perhaps it is just easier to ignore them. Ignore the pundits, buy and hold, and take a long-term view (or so the classic theory goes). This, however, strikes me as a flawed argument. All portfolio investments are effectively “bets.” If, for example, you invest in stocks “for the long run” and buy/hold/rebalance, you’ve made an implicit bet that equity returns will be higher than other assets in the long run (along with a host of other assumptions). The fact that your investment wasn’t justified in advance by an explicit forecast or prediction is irrelevant. An implicit guess is still a guess. On the other hand, a forecast with a well-constructed rationale is an educated guess – one that may provide an investor with additional insights. In this new era of transparency and fiduciary responsibility, investment professionals should value a well-constructed rationale for their portfolio allocations.
So if you have the inclination, read the outlooks you can – particularly those from people who challenge your point of view. Do this, however, with a healthy dose of skepticism. Markets are highly unpredictable. We’re all guessing to some extent. Judge us by our arguments and theories.
This article is for informational purposes only and should not be construed as investment advice. Any economic projections or forecasts contained herein reflect subjective judgments and assumptions, and unexpected events may occur. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.
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