The Planner's Perspective: Every Year is an Anomaly
By Paul Morrone CFP®, CPA, MSA
Almost every year is an anomaly in the world of investing and capital markets. It doesn’t matter which market you are referring to; if history has proven one thing it is that predicting what is going to happen tomorrow is nearly impossible. This year alone marked a plethora of blown forecasts, statistical anomalies and outright unbelievable circumstances that have some of the brightest minds in the world scratching their heads. With historically low volatility, stocks around the world have soared during 2017, even in spite of serious political turmoil and geopolitical uncertainty.
During the fourth quarter of last year we were listing to analysts’ forecast for 2017 as it related to the various capital markets. At that point in time, many of the large and well respected financial institutions posted their research reports, all of which had a similar story to tell. Analysts’ expected the S&P to appreciate in the mid-single digits throughout 2017. They expected a rocky ride, with heightened volatility leading to dramatic price swings during the year, all while waiting for the ‘long overdue correction.’ The actual result: the S&P was up about 18% through November 30th and volatility remains at historically low levels.
In addition to speculation about equity performance, there were also interest rate predictions a plenty. Most targeted an end of the year 10-year treasury yield of 2.75% - 3.25%, predicated on at least two Fed tightening cycles. The rate at the beginning of the year was just shy of 2.45%. At the end of November, the 10-year treasury yield actually LOWER than it was to start the year at 2.40% (and has even dropped lower in early December!). While these fractional percentages may not seem like much, remember, we are not talking rates of return for an asset class, but yield on the fixed income investment.
The same thing is now happening domestically with respect to tax reform. We are seeing numbers all over the board with respect to anticipated GDP growth from corporate and personal tax cuts (I’ve seen everything from 0.4% to 3.5%) or potential effect on the national debt (again, anywhere from net zero impact to an increase of $1.75 trillion). There is also much speculation as to how companies are going to spend their long-overdue savings from tax cuts and repatriation of overseas cash, whether it’s in the form of increased dividends, share buybacks, capital investment or hiring. While these decisions will likely be made at the individual company or business unit level, what most investors care about is how is it going to affect their portfolio. Again, only time will tell.
The simple fact is this, whether you want to call it predicting, speculating, forecasting or flat out guessing, history shows that no one will ever be able to predict what is going to happen tomorrow. This universal truth is one of the reasons that maintaining a disciplined approach to investing is so important. Decisions based upon emotions, mainly fear and greed, rarely produce stellar long-term results and may directly conflict with the goals of your personal financial plan. A well-crafted plan will help determine the appropriate risk tolerance and investment objective for your hard earned wealth and help separate emotion from logic throughout investing process.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.