The last few years have been a great reminder that predictions based on macroeconomic events can be very unreliable guides to the future.
If someone with perfect foresight in January 2020 told you the following would happen over the next 3+ years, how would you react?
- Global economic shutdown
- Worst pandemic in 100 years
- Highest inflation in 40 years
- Two 20% equity drawdowns
- Geopolitical conflicts
Many investors would likely be lured into making a “market timing” move to reposition into a much more conservative allocation. Most would expect stocks to really struggle in that environment. However, despite all of these macroeconomic events actually taking place, US stocks have gained 34% since January, 2020 and balanced portfolios (60% stock/40% bonds) have gained 18%. Investors who flocked to “safe” assets have significantly lagged with bonds losing -5% and cash only up 3%.
An even more recent example involves predictions regarding European stocks. Capital Group Portfolio Manager Andrew Suzman said it best with the following:
“A year ago, if I told you that the war in Ukraine would continue to drag on, that the European economy would produce virtually zero growth and that U.S.-China tensions would intensify, I doubt you would have expected a positive return for international stocks. And yet, despite the escalating war in Ukraine, skyrocketing energy prices, record high inflation and weak economic growth, European markets have staged a powerful rally, outpacing U.S. stocks over the past two quarters.
Even with the benefit of perfect hindsight, or a crystal ball, you might still have come to the wrong conclusion. Knowing all the macroeconomic facts in advance, we would have predicted negative returns. The headlines would have misled us.”
These events prove the difficult nature of successfully predicting macroeconomic events and market reactions. Rather than trying to time the market and drastically shift portfolios, we suggest sticking to the tried and true principals of diversification, rebalancing and tax loss harvesting.
Today’s headlines are dominated by the looming debt ceiling debate, potential government default, inflation, the Federal Reserve and an impending recession to name a few. Please don’t let the “expert” predictions cause you to make an emotional decision to change your long-term portfolio allocation. Markets have weathered the storm of events like this in the past and will continue to do so going forward. There will certainly be bumps along the road, but diversification can win over the long-term.
Condoleezza Rice summed it up best many years ago when I listened to her at a conference say “today’s headlines and tomorrow’s reality are seldom the same.”
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