December 18, 2019: Two Kinds of Forecasters


“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

-          John Kenneth Galbraith

‘Tis the season for economic and stock market forecasts for the upcoming year.  The precision with which some forecasters express their opinions continually amuses us, particularly when examining their low success rates.  Human beings crave answers, even for unknowable aspects of life such as whether the stock market will rise or fall during the next year, so there will always be job security for forecasters.

As we wrote in our last letter, the U.S. economy is enjoying its longest expansion in modern history, and the U.S. consumer appears to be in solid financial shape.  Outside of the U.S., many economies are exhibiting hints of bottoming following slowdowns this year.  Global monetary policy is accommodative.

As to the investment markets, stock prices have risen nicely in 2019 following a sharp fourth quarter correction last year.  We are pleased to see broader participation in stock gains in recent months, with non-U.S. and economically cyclical companies’ stocks joining the fun.

Short-term Versus Long-term Forecasting:

Despite the plethora of short-term forecasts this time of year, please remember that no one knows the near-term direction of economies or investment markets.  We believe there are reasons for optimism regarding global economic growth and rising investment markets in 2020, but we also respect the potential impact from uncertainty over issues we cannot control (e.g., trade issues, U.S. presidential election, Brexit).

As to long-term investment forecasts, current interest rates tend to be good predictors of future bond returns, and stock valuations tend to be good predictors of future stock returns.  Regarding bonds, we believe their role as a risk-reducer is as relevant as ever, but it is difficult to see how bonds can produce high returns in the future given their extremely low yields currently.

In terms of stock valuations, it depends on whether you compare them to their past valuations or to other types of investments.  Examining certain valuation measures such as price-to-earnings ratios, dividend yields, and the total value of the stock market relative to the economy, stocks look expensive relative to their historical valuations.  We believe that the more expensive stocks are, the more vulnerable they are to bad news and the more likely they are to earn below-average returns over the next 5-10 years.

Comparing stocks to bonds, on the other hand, makes stock prices look more reasonable.  After a period of rising interest rates in 2018, whereby investors could earn safe returns of 2.5-3%, rates have come back down this year.  Once again, it is difficult to find a safe return above 2%.  Consequently, stock market valuation models that incorporate the low level of interest rates make stocks look attractive in comparison to safe investments.  If interest rates remain low, it seems reasonable to believe that stock valuations will remain high.

Ultimately, we think the combination of low interest rates and rich prices on stocks and bonds demands humility with respect to future long-term return expectations. In short, we do not think it is a time for boldness or overconfidence. However, we feel just as strongly that it would not be appropriate to abandon your asset allocation plan, which is based upon your time horizon, cash flow needs, and ability to mentally withstand downturns without abandoning your plan. We will continue to manage your investment portfolio according to these principles.


Past performance does not guarantee future results.  Investment strategies discussed may not be suitable for all investors.  Diversification does not guarantee against investment loss.  The information provided here is for general informational purposes only.  The inclusion of specific securities within the context of broad economic commentary is not intended to be a recommendation.  Investors should thoroughly evaluate any security before taking action.  International investments involve special risks, including currency fluctuations and political and economic instability.  Opinions expressed are subject to change without notice in reaction to shifting market conditions.  Data contained herein is obtained from what are considered reliable sources.  However, its accuracy, completeness or reliability cannot be guaranteed.


March 3, 2020: Coronavirus
August 7, 2019: The One-handed Economist

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