Ever wanted to travel back in time? Google has a fun tool where you can select search results from a specific time period:
At the end of each year, I find it interesting to go back 12 months prior and see what market forecasters were saying heading into the upcoming year. As we close out a painful 2022 and look to 2023 just around the corner, we’d like to partake in some hindsight bias and look at how 2022 predictions played out.
Disclaimer: I’d like to make it clear that I have nothing against economic and stock market forecasters. Their job is incredibly difficult and the individuals formulating these forecasts have exceptional academic credentials and talent. What we want to simply show is that forecasts tell you little about what lies ahead in financial markets. If markets could be accurately forecasted, there would be little risk to investing in them; hence, the exceptional returns that capital markets have produced over the decades would cease to exist.
We will focus on these 4 asset classes:
- Real Estate
- Bonds & Interest Rates
Let’s look at some figures to illustrate where Wall Street’s largest banks had the S&P 500 index finishing at the end of 2022:
We see that some of the banks were rather bearish at this time last year, but many had the S&P finishing 2022 somewhere around 5,000 points. There is still one week left in 2022 as of the date of this article so perhaps we are in for one heck of a finish!?!?
Many investors predicted growth stocks to continue to outperform as inflation pricing pressures took hold; however, we see an alternate story in 2022 where value was the clear winner across all markets.
Disclaimer: Meredith Wealth Planning uses Avantis and Dimensional funds in constructing client portfolios.
Another interesting point worth noticing is how “Factor” based small value funds have performed relative to a broad market benchmark such as the Russell 2000 Value index. 2022 clearly demonstrates that applying a systematic and active approach to passively owning the market can add significant value over time.
We see a similar pattern within the real estate market as we do in other financial markets. A consistent overlapping theme across forecasts was that the Federal Reserve would continue to push rates higher, and this would slow down the red-hot housing market some. Rising mortgage rates were seemingly the consensus; however, I could not find a major 2022 forecast that had the average 30-year fixed mortgage rising into the 5’s and beyond by April.
At the end of 2021, we saw inflation on the rise, but the major question was what to do about it heading into 2022. It looks like Wall Street couldn’t figure out that question either when it comes to one of the most common inflation hedging asset classes: Commodities.
Again, we see predictions for both positive and negative returns in 2022 and the case for each. While JP Morgan missed the mark on equities for 2022, it looks like they nailed it on commodities. This highlights another concern, who do you trust?
Bonds & Interest Rates
Remember back to December of 2021 when we knew inflation was heating up, but nobody was sure on how hot it would get or how long it would last? Looking back, it all seems so obvious, avoid bonds and prepare for high inflation throughout 2022.
Many bond forecasts for 2022 were correct in calling for inflation, rising rates and a loss on bond portfolios. But we take issue with this, forecasters also made similar claims heading into 2021….2020….2019….2018 etc.. If you keep making the same prediction long enough and it eventually happens, that doesn’t make you a fortune teller.
Hindsight Bias: the tendency, upon learning an outcome of an event—such as an experiment, a sporting event, a military decision, or a political election—to overestimate one’s ability to have foreseen the outcome. It is colloquially known as the “I knew it all along phenomenon.” – Britannica.com
The financial services industry will be flooding consumers and clients with their 2023 market outlooks this month. Here at Meredith Wealth Planning, we believe it is important to recognize what “has” and “is” happening in markets, but we side with the evidence showing that market forecasts provide no reliable value to client portfolios. Why play that game when you don’t have to?
A recent tweet from @ValueStockGeek caught our attention showing an excerpt from “Greenlights” by Matthew McConaughey.
As humans, we hate uncertainty especially when it comes to our hard-earned cash and savings. The thought of not knowing how things will play out terrifies us and causes anxiety. With that said, we encourage investors to interpret market forecasts for 2023 keeping in mind how prior years forecasts have panned out. Finding information that the market is ignoring is hard enough; figuring out how the market will react to that information is next to impossible.
“It’s tough to make predictions, especially about the future.”
Disclaimer: You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.