Today I’m talking about market forecasts and predictions.
Unlike the core principles that create a successful investment outcome, the financial + economic environment is always changing.
And the current environment drives a lot of our assumptions and decisions about the future.
While I think investors should ignore most pundits, I do believe thoughtful forecasts are valuable.
If you want to learn more about how to approach stock market forecasts (which there is no shortage of right now!), this episode is for you.
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Resources Mentioned:
- S&P 500 Historical Performance
- S&P 500 Beats Dow and Nasdaq [Marketwatch]
- A Tale of Two Decades [Vanguard VCMM Research]
- Market Perspectives: December 2021 [Vanguard]
- Monte Carlo Analysis Quote [Kitces/Keynes]
Why You Should Pay Attention to Stock Market Forecasts
Taylor Schulte: Welcome to the Stay Wealthy Podcast and happy New Year. I'm your host, Taylor Schulte, and today I'm recovering from a little technical issue that we had here on the podcast in the chance you saw or even listened to yesterday's episode, which aired on our typical Tuesday morning schedule.
You might notice that it's no longer in your podcast feed, but don't worry. I'm gonna quickly summarize what you might have missed yesterday and use it as a foundation for today's what I'm gonna call bonus episode about market predictions and forecasts.
And if you happened to catch yesterday's episode, you can go ahead and fast forward through the next two minutes or so, or just stick around and get a quick refresh before I move into today's topic.
So in yesterday's episode, I briefly shared two updates. One was a big thank you to the almost 200 listeners who threw their names in the hat for the stay wealthy sweatshirts and completed this survey. Many of you went above and beyond to provide optional written feedback to help improve this show, which was incredibly generous and helpful.
So thank you very, very much. For those of you that completed the survey, the winner's names have been drawn, and you'll hear from me by the end of this week with an update and next steps to claim your stay wealthy sweatshirt.
The second update was with regard to our foundation leak, which I shared about in the last episode of 2021. After sharing that episode, a number of listeners reached out to me with your personal stories about water damage insurance claims, and it sounds like many of you have started to reach out to your insurance agents to confirm what's covered and what's not covered, especially when it comes to water damage.
So when and if you get a clear response from one of your agents, please do let me know what they say so I can validate some of the comments I made last month and help everyone better understand how insurance companies are handling these types of claims.
I also shared that while everything has gone very smoothly from my family and I with regards to insurance and the handling of our repairs, by the way, which will be in the six figures here soon, we'll be out of our house for another 30 days still making this almost a two-month process. But in a weird way we've kind of enjoyed it.
We've learned a lot and we've had a lot of fun staying in what will be our fourth home as we gear up to move to our last and final Airbnb later this week. The kids think this is the longest vacation of their lives, so it'll be quite the wake-up call when we have to move back into our home.
Okay, with those updates out of the way, let's get into today's episode. For all the links and resources mentioned, head over to youstaywealthy.com/138.
Okay. As mentioned, I'm gonna quickly recap yesterday's episode and use it as a foundation for today's bonus topic about market predictions and forecasts. My apologies again for the technical issues to start the year and thank you very much for bearing with me.
So yesterday I had shared that the stock market tends to surprise the majority of people. Hindsight is 2020, and looking back, it might seem like the last three years and the market's performance makes perfect sense. But if we're being honest and objective, I would argue that the last three years surprised the majority of investors, even the so-called experts.
For example, you might remember that in December of 2018, the S&P 500 dropped almost 20% in a short period of time. Very few people were optimistic after that heading into 2019, and yet the S&P 500 returned north of 30% that year.
2020 caught even more people off guard. As Covid 19 made headlines, the S&P 500 dropped 34% in 33 days. It was the fastest bear market in history. And if that wasn't surprising enough, the stock market bottomed in mid-March of 2020 and ended the year with a positive 18% return. And then while many entered 2021 feeling good and optimistic, it's possible that they weren't optimistic enough.
The S&P 500 returned a positive 27% last year in 2021 and closed at a record high 70 times. That's 70 zero a record high 70 times last year. It also beat both the Dow and the NASDAQ by the widest margin in 24 years. In fact, it's only the sixth time in history that the S&P 500 beat the Dow and the NASDAQ in a single year. The previous five times were in ‘84, ‘89, ‘97, ‘04, and ‘05 as mentioned at the top of the show.
The market tends to surprise the majority of people, but we can learn a lot from these unexpected events and use them to make better, more informed decisions as retirement investors. More specifically, yesterday I shared three things that we can take away from the last three years.
Number one, like a doctor, it's critical to diagnose before prescribing. And we can say the same thing about financial planning, a prudent investment portfolio, i.e. your prescription needs to be supported by a comprehensive financial plan i.e. your diagnosis. As I've said numerous times on this show, your investments should not change unless your investment policy statement changes and your investment policy statement shouldn't change unless your financial plan changes.
Number two, to be a successful investor, we have to exercise both patience and discipline. Reacting to markets, making emotional, sometimes irrational decisions with our money, and neglecting to take a long-term approach can be wildly damaging to our retirement plans.
And then finally, number three, we don't need a crystal ball to tell us exactly what the future holds in order to accomplish our financial or retirement goals. Most investors didn't know what ‘08 and ‘09 had in store for them, but for those that had a sound financial plan, exercised patience and discipline, and avoided making costly, irrational decisions with their money, their financial goals remained largely on track.
And the same can be said about the bear market in August of 2011. Nobody saw that coming and again in December of 2018, and even more dramatically in March of 2020. Now, while we don't need a crystal ball in order to achieve and accomplish our retirement goals, and I think you should largely ignore most of the pundits who are gonna be making their rounds in the next month pretending that they have one, I do think that there's value in paying attention to stock market forecasts and predictions.
Let me try to explain here. The foundation of being a good investor remains relatively unchanged for me personally. That foundation is essentially made up of four basic rules. Number one, mitigate fees and taxes. Number two, diversify. Number three, discipline and patience. And number four, apply academic principles.
So while that foundation hasn't required any changes for the last hundred years and will remain relatively unchanged going forward, we can't always say the same thing about the financial and economic environment. And the current environment drives a lot of our assumptions and decisions about the future. For example, the 10-year treasury is currently yielding about 1.6%. Since the current yield of a bond is a good predictor of its future return, it wouldn't be wise of us to expect a five or 6% annual return from our investment-grade bond portfolio.
Jack Bugle, the founder of Vanguard, has a great quote that says,
Treat history with the respect it deserves.
Neither too much nor too little. So while we can use history and historical data to help us make informed investment decisions about the future, we have to be thoughtful and intentional about how we use that information. We can't always assume that history will repeat itself. And sometimes in the case of our bond portfolios, let's say it's quite evident that the next 10 years for the bond world will most certainly not look like the past 10 years.
Now, forecasts and predictions about the investment-grade bond market are certainly easier than the stock market. Much of the bond market comes down to a simple math, but the stock market, as we all know, can have a mind of its own. That said, forecasting and setting reasonable intelligent expectations about the future performance of our stock portfolio when we're making investment in retirement decisions is still an important piece of financial planning.
As Vanguard puts it, a good forecast objectively considers the broadest range of possible outcomes and clearly accounts for uncertainty and compliments. A rigorous framework that allows for our views to be updated as the facts bear out.
In case you're wondering, Vanguard does in fact regularly publish market forecasts, and they've actually maintained a good track record, mostly because they take an intelligent, thoughtful approach and follow a rigorous framework. They don't put their finger in the air and decide that the stock market's just, you know, gonna be up 10% this year. They use the information and data that we have available to us today to generate a range of potential outcomes across different asset classes in the future.
Not all that different from a Monte Carlo analysis where my friend Michael Kitces quotes Kanes by saying,
I'd rather be vaguely right than precisely wrong.
And that's the approach that Vanguard and many others have taken with their market forecasts. So while many advisors, including yours truly will largely tell you to run screaming from market forecasts and predictions, especially during this time of the year, I thought it was an appropriate time to clear the air a little bit and acknowledge that forecasts do serve a purpose.
Forecasts that are done with academic rigor and are applied properly to help set reasonable expectations, not to make a quick buck or get more eyeballs and clicks. So with that, here are some of Vanguard's forecasts about the next 10 years.
First they said lower returns based on today's ultra-low interest rates and elevated stock market valuations. More specifically, they expect international stocks to strongly outpace US stocks in the neighborhood of three percentage points per year for the next 10 years.
And then as previously shared on the podcast, they also expect US value stocks to outpace growth stocks by about 4% per year. And then finally, not so surprisingly, they expect an interest rate hike in late 2022 and inflation to stay above 2%. If you're interested, I'll link to their recent forecast as well as more details around their forecasting methodology in the show notes, which can again be found by going to youstaywealthy.com/138.
While much of what I've talked about up to this point is on the optimistic side of things, I think we do have to acknowledge that we’ll most certainly see some rough years ahead. For one, the stock market on average, as you guys likely know it, I've mentioned this before, the stock market on average ends the year in positive territory three out of every four years.
At 75% of the time, four years ago, that was 2018 was the last time we saw red in US stocks. When they finished the year down 6%. Prior to that, in 2015, US stocks were down about 0.73%. And then of course, we had 2008 before that with US stocks down almost 40%.
So for the last 14 years, the US stock market was in positive territory about 80% of the time. That's slightly above its long-term historical average. Given that in addition to low-interest rates, inflation surprises, supply chain issues, et cetera, it wouldn't be entirely surprising to see US stocks get challenged this year or next, sometime in the next, you know, five years or so.
While many investors will and should view any sort of pullback as an opportunity, if retirement or a major life event is around the corner, now would be a prudent time to ensure that you're invested properly while the market is healthy.
And that comment truly doesn't have anything to do about predicting the future. The financial plan, changing i.e. retirement around the corner is the driving force behind any sort of investment change. And just since the market is coming off another positive year, it more easily allows for those changes to be made because when not, if the market drops 20 plus percent, the only change you'll likely be able to make is to move your retirement date, find a way to decrease your expenses or some combination of the two.
Selling your investments at a loss to begin funding retirement and or, you know, making major allocation changes in a bare market is likely not gonna be the prudent move.
In summary, while I will warn all of you and, and most investors to ignore market predictions and, and the pundits who are gonna pretend to have a crystal ball so that they can get more eyeballs or sell more books or, or sell more advertising, I do believe that there's a place for thoughtful analysis and forecasts.
We can use sound forecasting to set reasonable expectations about the future and make educated and informed investment decisions. We can establish a range of outcomes knowing that nobody knows exactly what's gonna happen and we're prepared to be vaguely right while avoiding being precisely wrong.
As we head into 2022, please know that I'm here for you as a resource and a sounding board, and I'm really excited to play a small part in your journey to investing in retirement success. As always, if you have any comments, questions, or feedback or you just wanna say hi, you can send me an email at email@example.com.
That's firstname.lastname@example.org. I read and respond to every message, so please don't hesitate. Shoot me a message. And to grab the show notes for today's episode, head over to youstaywealthy.com/138.
Thank you as always for listening, and I will see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.