Who doesn't love a good market prediction?
Seemingly, the answer is "no one." Certainly not the financial media, which hang on every word of the pundits who appear on TV in a nonstop cavalcade of contradictory soothsaying. And certainly not retail investors, who enjoy hearing the forecasts from their favorite pundits, armed with data and sophisticated modeling software to back up their assertions.
Of course, when picking favorites like this, most investors overlook the fact that the pundits who disagree have their own sophisticated modeling software, which shows something different.
Here's what is often going on: You're watching financial news, or reading a financial paper, and you find yourself paying attention to certain stories more than others. Interestingly, the stories that grab you tend to validate what you believe. These days, the majority of people seem to have some version of an Armageddon theory, so the more cataclysmic predictions get the most credence.
Regardless of your beliefs about markets and economies, it's not difficult to find sources that appear authoritative to validate those beliefs.
That phenomenon is known as confirmation bias. This occurs when people are drawn to ideas and beliefs that line up with their own. It's why political liberals agree with the commentary on MSNBC, while conservatives agree with Fox News. It's doubtful that either channel changes many minds; instead, they sell ads by preaching to the choir.
But the problem I have with market predictions, even if they are based on sophisticated-sounding models or chart reading, is that they are wrong a significant amount of the time.
I used to be employed by a company that published chart-based predictions about individual stocks, as well as large-cap U.S. stock indexes. This company was very straightforward that a very significant portion of market calls failed.
You might say, "I'll take that gamble." But the consequences for a wrong bet are far-reaching. To this day, I'm dealing with people who stampeded into cash in 2012 based on predictions that sounded smart and logical. That cash has been sitting there for more than three years, essentially losing its spending power, while people feel safe, or perhaps feel they are waiting for the proverbial second shoe to hit the floor.
As we've seen, predictions about end times are no more reliable than irrationally exuberant conjecture.
Sure, both the optimists and pessimists will eventually be right. That's inevitable. It's simply how markets work. See that? They're both right -- it just depends on what period of time you're tracking.
If you don't believe me, and still need validation for a pet theory, you might want to check out this report by CXO Advisory Group, which used some pretty stringent methodologies to determine the sub-optimal track records of most who attempt market forecasting.
But, since forecasts are popular, I'll end this with mine. No, this isn't a snark. It's serious.
After a multiyear rally, the S&P 500 index is going nowhere fast as we head into the final days of 2015. At some point, maybe in 2016, we'll see a significant downturn in large U.S. stocks.
I'll take that prediction a couple of steps further. Although it's tempting to buy into our hysterical zeitgeist and believe something far, far worse than 2008 is on the horizon, I don't see that coming. I believe the next correction in large U.S. stocks will be tamer than that debacle.
Next, I'm also very comfortable predicting that while U.S. financial media will go into a frenzy of hand-wringing over the next S&P 500 or Dow Industrial Average downturn, the talking heads will ignore other asset classes that are offsetting, at least in part, the decline in large U.S. stocks.
Finally, and this is the big reveal in today's show, ladies and gentlemen: I'll predict that investors with globally diversified portfolios will emerge from the next downturn in U.S. stocks in better shape than the majority who shuffle their portfolios in an effort to outsmart an inevitable -- and very predictable -- market pullback.
