Does predicting the health of the economy improve investment results?


Does predicting the health of the economy improve investment results?

The health of the economy is important for many reasons. When the economy is strong, more people are employed, and more businesses turn a profit. And if you own stocks, you own a piece of those businesses. Thus, it makes perfect sense that economic issues garner a lot of attention from the investing public, the media, and politicians.

The media has a steady stream of economic data to report and dissect. Plus, politicians tout their policies as good for the economy and their opponent’s as bad. Given the attention, one might be under the impression that predicting the health of the economy would produce better investment results than those attained by ignoring economic predictions and simply investing over the long term in a diversified, patient, and disciplined manner.

But the markets simply don’t work that way, and never have. While the two sync up from time to time, the relationship between the economy and changes in stock prices is not matched in the short term or the long term.

While the two sync up from time to time, the relationship between the economy and changes in stock prices is not matched in the short term or the long term.

If you have been investing in financial markets for any length of time, you have seen many instances where the stock market behaved in ways that ran contrary to the health of the economy. You have seen bad markets in good times and good markets in bad times. The Coronacrash and subsequent recovery is just the latest example, albeit one of the most dramatic. This behavior aligns with a few principles which have held consistently over market history.

The economy and the market are two different animals

First, markets react to new information quickly. As new information arrived about the unique nature of COVID-19, the S&P 500 index dropped. Other than the one-day shock in 1987, the Coronacrash was the fastest decline of 20% or more the S&P 500 index had ever experienced in its 94-year history. It reached its low down 34%, interrupted by five days in which the Dow rose at least 1,000 points.

Second, markets are driven by relatively few securities. The S&P 500 index had fully recovered in August, but most stocks had not. This is not unusual. In fact, a “narrow market” is more the norm than the exception. (See Why many investment managers deliver poor results.)

one dollar billThis narrowness is one reason why buying only the relatively few stocks one might think will be star performers is a riskier way of investing than being broadly diversified. For a statistical analysis on this, see our post, The Power of Concentration. It is notable that we wrote that piece because the media at the time (2010) was describing the narrow market as unusual and uniquely dangerous. Had you exited stocks out of fear that the markets were driven by just a few stocks, you missed out on one of the strongest decades on record.

The third principal is that markets are “forward looking.” In simple, practical terms, this means the market fluctuates based on the consensus of what market participants think the future will hold. This is the most common intuitive explanation for why markets often rise when the economy is not doing well. It rises because enough market participants think things will improve.

There is no announcement or horn which blows signaling that the consensus has turned positive, it just happens and often happens quickly. We saw it occur with COVID-19. Markets started going up and rose quickly as economic news was getting worse. We don’t make predictions about markets but we described this possibility in our post, Why and how markets recover.

Economic predictions don’t help

These three (and other) principles support our strategy that one is far more likely to have a successful investment experience by investing for the long term rather than trying to trade around short-term data or predictions about future events. Nonetheless, some people are obsessed with trying to predict economic health and maneuvering a portfolio based on those predictions; however, this has always been a low probability approach because it requires too many correct predictions to work.

…one is far more likely to have a successful investment experience by investing for the long term rather than trying to trade around short-term data or predictions about future events.

Try to keep all this in mind as we near the election. Politicians always say their opponent’s economic policies will be devastating. Despite their strong desire for a healthy economy, almost every President in modern times faced a recession and significant stock market declines during their time in office. It matters who wins our elections, of course, and you should support the candidates you think will serve our country best.

But, when it comes to investing, following our firm’s mantra of diversification, patience, and discipline and applying it consistently over time is likely to produce a better result than moving money around based on economic predictions. Invest, don’t speculate.

 Contact Us


Moisand Fitzgerald Tamayo, LLC is an Orlando, FL and Melbourne, FL based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between.

If you have any questions or would like to discuss anything further, please give us a call or send us a note.

If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right.

For more frequent updates, follow us on FacebookLinkedIn, or Twitter.

 

Important Additional Information & Disclosures


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moisand Fitzgerald Tamayo, LLC-“MFT”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. 

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from MFT. 

Please remember that if you are a MFT client, it remains your responsibility to advise MFT, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MFT is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Tax advice is given only to clients and only when agreed to by MFT. A copy of the MFT’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.

Please Note: MFT does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to MFT’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Please Note: Limitations:  While MFT does NOT pay for recognition, awards, or publicity, neither rankings and/or recognition by unaffiliated rating services, publications, or other organizations, nor the achievement of any designation or certification, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if MFT is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers. No ranking or recognition should be construed as a current or past endorsement of MFT by any of its clients.  ANY QUESTIONS: MFT’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including providing the criteria used for any reflected ranking.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your MFT account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your MFT accounts; and, (3) a description of each comparative benchmark/index is available upon request.

 

About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.

WANT TO KNOW WHEN WE POST NEW MATERIAL?

As a Sanctuary From The Noise®, we only post information we believe timely and important to the long term financial success of our clients. Follow us to receive emails - no more than once a month - about new posts.

We keep your information private and make stopping our emails as easy as starting them.

Something went wrong. Please check your entries and try again.
Share This