“The only function of economic forecasting is to make astrology look respectable.” John Kenneth Galbraith (Canadian-American Economist)
The economy is entirely uncorrelated with the stock market over any but the very longest time horizons. Yet, many investors get caught up in the economic news du jour as they seek to make educated investment decisions. These are, at their heart, mutually exclusive. The economy can be on firm footing with retail sales shooting to the moon and unemployment low. That doesn’t stop the market from swooning due to imprudent management decisions or lackluster sales. Conversely, the economy can be in the depths of despair, ravaged by whatever metric you’d like to choose…all the while the markets cheering companies’ robust earnings and sales forecasts.
The market is fickle, at best. No one quite ever knows which way the market will go. Up or down or sideways. In fact, on any given day, there’s about a 50-50 chance (54% vs. 46% to be exact) it will be positive or negative. But, as you lengthen your time horizon, the chance of the markets generating a positive gain begins to increase. In fact, over every given rolling 20-year period from 1926 to 2019, the market has been positive. This, in spite of the gloomiest economic forecasts known to man.
At the bottom of the Great Financial Crisis, if someone were to ask you how the economy would perform over, say, the next 4 years; no one on planet earth could’ve accurately determined that it would be one of the slowest recoveries ever (GDP grew around 1.5%, unemployment never dipped below 7%). Yet, the market, over that same timeframe (including dividends) was up around 140%!
The markets are resilient. Economic forecasting, while interesting, is completely disconnected from an investor’s goal.
That goal being: Stay calm, stay invested!
