The Forecast: All Wrong

Submitted by Lon Jefferies on Tuesday, December 23, 2014 - 9:00am
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The media love forecasters, yet seldom holds them accountable for how the prediction turns out. At the beginning of 2014, we heard some widely accepted expectations of the investment environment. Let’s review those predictions. Spoiler alert: They’re all wrong.

The investment media is a rare industry in which professionals are rewarded for making bold projections but never punished for being wrong. The more outlandish a pundit’s forecast, the more attention it receives. Don’t let these prognostications drive your investment decisions.

Bloomberg News recently published a story titled Predictors of ’29 Crash See 65% Chance of 2015 Recession, in which the grandson of a prognosticator who luckily forecasted the Great Depression is still getting attention for a guess his grandfather made 85 years ago. If giving credence to forecasters isn’t ridiculous enough, suggesting there is a gene for forecasting is insane.

The article doesn’t mention that the same grandson made similar headlines with the same forecast in both 2010 and 2012. Of course, those predictions did not work out so well, and neither did some others projections we see this year:

Interest rates. At the beginning of the year, all 72 economists Bloomberg surveyed predicted higher interest rates and falling bonds prices in 2014. Investors questioned whether they should reduce or eliminate the bond portion of their portfolios until the rate increase occurred.

But did we experience this rise in interest rates? On Jan. 1, 2014, the yield on the 10-year Treasury note was 3%. Today, it is around 2.16%. That’s right. Interest rates actually decreased significantly during the year. As a result, iShares 7-10 Year Treasury Bond (IEF), the exchange-traded fund that tracks the 10-year note, produced a return of 8.92% during the year. Not bad for the conservative portion of your portfolio.

Quantitative easing. The most widely promoted fear among forecasters was that the phasing out of the Federal Reserve’s quantitative easing (QE) stimulus program would diminish stock returns. They also worried that when the Fed lowers the amount of loans the government buys from banks, it reduces the amount of money available for new businesses to borrow, leading to less job creation.

This fear did not come true. Every month in 2013, the Fed bought $85 billion of financial assets from commercial banks. The Fed reduced this amount gradually after every meeting it held this year, finally eliminating the purchases completely in October. Clearly, fading out the quantitative easing didn’t hurt stocks or the job markets. The unemployment rate declined from 6.6% in January to 5.8% in November. The Standard & Poor’s 500 gained 12.3% year-to-date.

Increased volatility. Another forecast at the beginning of the year was that 2014 was likely to be more volatile than the previous year. There were talk about valuations or price/earnings ratios being too high, concern about the war in Ukraine (Terrorists group ISIS wasn’t even in the headlines yet), and endless noise about unfavorable weather patterns impacting the market.

So has 2014 been a wild ride? Since 1929, the S&P 500 moved more than 1% up or down during 23% of trading days. In 2014, the S&P 500 moved more than 1% only 15% of the time. Less movement equates to less volatility, so again, forecasters were inaccurate.

The most significant lesson inherent in these numbers is that market expectations are essentially useless. Of course, this is not to say that interest rates will never rise, that bond values will never decline and that the market won’t return to the roller coaster it is. In fact, all those things are certain to happen. But anyone who contends to know “when” likely doesn’t actually know any more than you or me.

Instead of acting upon projections, having and sticking to a diversified investment strategy that coincides with a detailed financial plan is the most probable path to financial success.

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Lon Jefferies, CFP, MBA, is an investment advisor with the fee-only financial planning firm Net Worth Advisory Group in Sandy, Utah. You can find Lon on Twitter, LinkedIn and Google+. Contact him at (801) 566-0740 or

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