2019: How Market Predictions Can Mislead

By Jon Theriault, CFP®, CKA®, MBA

As the year comes to a close, 2019 will certainly have had its fair share of examples to demonstrate how unpredictable markets can be.

Inside the US

US policy makers expected interest rates to rise, but instead they fell.  American consumer confidence weakened as the year began, and news headlines broadcast fears of an economic slowdown. However, those investors who moved  to the sidelines in anticipation of the slowdown missed substantial gains in the US stock market. As of the end of November, the S&P 500 was up over 25% for the year, placing it on course for its best showing since 2013 should the gains hold through December.

A closer look at interest rates and the bond market shows just how unpredictable asset performance can be. Going into 2019, Federal Reserve officials expected economic conditions to support raising a key interest rate benchmark twice. Instead, policy makers lowered it three times.

The Treasury yield curve inverted for the first time in more than ten years as long-term yields fell below short-term yields over the summer, which in the past has signaled that a recession was coming, although unemployment and wage growth continues to be strong. Yields on medium-to-long term bonds were at historically low levels at the start of the year, but they fell even lower by the end of October.  Investors who made moves based on the expectation yields would rise in 2019 may have been quite disappointed in how events ultimately transpired.

Outside the US

Events weren’t any easier to anticipate in the global equity markets, where no evident link appears between markets that performed well last year and those that have excelled this year.

Greece,  the site of an economic crisis so dire that some expected the country to abandon the euro earlier this decade, has had one of the most robust stock market performances among emerging economies in 2019. On top of that, Greece issued bonds at a negative nominal yield, which means investors paid for the privilege of lending the government cash.

Among 23 developed market countries, only one country was a top 5 performer for both 2018 and 2019 — the United States. Finland, last year’s strongest performing market, ranked 22nd this year through the end of October. Among emerging markets, Greece swung from a 37% decline last year to a 37% advance this year through the end of October.

In Summary

History has shown there’s no compelling or dependable way to forecast stock and bond movements, and 2019 was a case in point. It seems like we talk about this every year, but the analysts and other market predictors were once again wrong, and wrong in a big way.

Rather than basing investment decisions on predictions of which way debt or equity markets are headed, a better strategy is to hold a range of investments that focus on systematic and robust drivers of potential returns. Investors who were broadly diversified across asset classes and around the globe were in position to enjoy the returns that markets delivered.

Last year, this year, next year — this approach is a timeless one.