John Robinson |

By John H. Robinson, Financial Planner (January 28, 2024)

It is a time-worn and utterly inane tradition that virtually every financial institution, bank trust department, insurance company, brokerage firm, mutual fund, and portfolio manager – along with countless legions of individual financial advisors ushers in the new year by sending their clients and social media followers their stock market forecasts for the year ahead. 

A few weeks ago, a longtime FPH  client sent me one such prognostication from a portfolio manager that had been forwarded to him with the subject line – “Do you think we should listen to this guy?” I rolled my eyes, but, as a courtesy, I read the commentary. The author predicted sharply higher interest rates, continued high inflation, and a prolonged bear market in stocks… and then I read the date of the newsletter and burst out laughing.  I do not know what rabbit hole my client followed to come upon this article, but it was dated 1/2/2023. It was the portfolio manager’s prior year forecast!  So how did he do?  In short, not so hot. The U.S. stock market rose about 20%, interest rates rose a little bit during the year, but declined in November and December, and inflation declined sharply.


Driving Through the Rearview Mirror

Had this forecast been dated 1/2/2022, it would have been downright prescient.  The author would have nailed the trifecta – the stock market declined more than 20%, interest rates on bonds and mortgages rose at the fastest rate in U.S. history and the inflation rate almost hit double digits. The proclivity of market forecasters to accurately predict the past is itself an interesting phenomenon.  In behavioral finance parlance, the tendency of recent events to shape future forecasts of inherently unpredictable events is called hindsight bias.  Simply put, if the markets ended the year on glum note, expect forecasts for the year to be predominantly pessimistic.  If the markets end on a high note, expect a more optimistic tone from forecasters.  This psychological paradigm was recently highltighed in an article in  by Wall Street Journal columnist Jason Zweig entitled, “All We Knew in 2022.” Mr. Zweig appears to share my disdain for market predictions.


A Random Walk on a Short Pier

When I was in my senior economics seminar in college in the late 1980s, Princeton University Professor Burton Malkiel’s best selling book “A Random Walk Down Wall Street” was required reading.  A fundamental tenet is that stock market returns are inherently unpredictable over the short term.  The book continues to be a best-seller today, and nothing I have witnessed over the past 30+ years has led me to question that premise. 

From that perspective, the annual ritual of financial professionals trumpeting their market predictions may be viewed as useful insofar as it lends credence to Random Walk Theory.  But if it is so well established that their market predictions are useless, then why do they still make them?  My best guess is that incorrect predictions are long forgotten, but correct ones become useful marketing material.


MY Predictions for the Stock Market

I have been proselytizing the Random Walk gospel for my entire career, but no matter how much or how loudly I preach about the unpredictability of near-term market returns, the most common question I field year-in and year-out is some variation of, “What’s your outlook for the market?"   Given the futility of my efforts, this year I have decided to give in and offer my predictions in a public forum instead of keeping them to myself.  As incredulous and as antithetical as this may sound, my past stock market predictions have come to fruition time and time again.  Maybe I will be wrong this year, but I doubt it.  Here goes:  

1. I expect the stock market to be volatile all year long. 

2. I would not be surprised by a stock market decline of 10% or more sometime this year or of  20% or more sometime within the next five or ten years.

3. Ultimately, I expect the stock market will hit new highs and go much, much higher in the future.

In case you have not figured it out, these are not really stock market predictions, but rather they are descriptions of the general nature of how investing in the U.S. stock market works.  The stock market is inherently volatile over the short run, market declines of 10% are common, and declines of 20% or more – the definition of a “bear market” - are not exceedingly rare.  There have been six such declines over the past 35 years.  Although the duration of bear markets has varied from 1 month to 31 months, betting that these declines would be permanent has always been a disastrously bad bet. Or, as I prefer to boast, I have successfully predicted the end of all bear markets during my professional tenure and my prediction that the stock market would hit new highs has been accurate 100% of the time. 


How Can You Be So Certain the Stock Market Will Keep Going Higher?

There are so many economic and political factors that go into determining stock prices every day.  Why should anyone believe that the U.S. stock market will continue to go higher?  The short answer is that almost all of that data is meaningless background noise.  This sentiment was shared in another recent Jason Zweig-penned article, “What I Learned When I Stopped Watching the Stock Market.”

While the daily chatter and drama make for useful news fodder, the reality is that the stock market is not all that ephemeral or mysterious.  As I explained in my February 2023 “Irreverent State of the Investment World Address,”   the fundamental reason the stock market goes higher over time is that most of the very real companies that comprise the stock market are profitable.  If they continue to earn more than they spend and pay out in dividends, over time they will be worth more.  Understanding the stock market does not need to be any more complicated than that.


Leave the World Behind

In December, another long-time client playfully chided me that my optimism for the future of the stock market and American capitalism in general should be tempered.  He had just watched the hauntingly plausible apocalyptic movie, “Leave the World Behind,” and asked me if watching that movie might alter our long-term investment strategy.  I had seen the movie too (and I recommend it).   I told him that if such a scenario unfolded in real life, just as in the movie, the last thing that people would be worried about would be their IRA and 401(k) balances.

Anyway, enough with the ridiculous market forecasting already.  We do financial planning here.


John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru.