Market-Timing and Expert Predictions

Thursday November 10, 2022 saw one of the best days for the US stock market since 2020 with a 5.5% gain in the S&P 500. The most widely offered explanation was inflation coming in about 0.2% lower than expected by economists and the large banks. There are two lessons that were reinforced for us.

First, the returns of the stock market that investors rely upon for their financial plans tend to happen in just a few days of each year. Specifically, the 5.5% gain is about equal to a year’s worth of expected annual stock market returns for the next decade, according to Vanguard (Market Perspectives November 2022). This demonstrates why market timing has such a poor chance of succeeding for a long-term investor. Even if market-timers are lucky enough to dodge the worst days, they still need to be in the market to capture the best days, and there was nothing that signaled to us that a day like November 10th was imminent.

Second, we once again witnessed the unreliability of expert predictions about the economy. This does not, in any way, impugn their knowledge or skills. Rather, it reflects the near impossibility of modeling an incredibly complex system with countless variables that interact in a myriad of ways. After consistently underestimating inflation which engendered negative consequences for the financial markets, the experts naturally gravitated to more conservative estimates.

During January, you will see more and more market predictions for 2023 such as Barclays (MarketWatch, 11/16/2022) stating that that stocks are “likely to bottom out” in the first half of next year with an S&P 500 Index Value around 3,200. We recommend that you pay no attention to these forecasts.