This commentary has arrived like clockwork yearly from the same client. All of them are always well articulated and thought out, with plenty of data and charts outlining the author’s conclusion.  In many cases it was also entertaining, with interesting stories and analogies.

There is only one problem: the investment outlook had been wrong for 15 consecutive years. This fund manager had maintained his negative stance on the global economy and stock markets ever since 2007, refusing to abandon the view that made him famous.  And this has been reflected in his fund’s performance; after massively outperforming in 2008, it has lost two thirds of its value even with a starting point before the financial crisis, while global equities gained +249% including dividends.

“However beautiful the strategy, you should occasionally look at the results.”

I read the first paragraph, which argued that Fed rate cuts are often a pre-cursor to negative stock market returns, concluding (as he has done every year since 2009) that valuations are unsustainable and that the current scenario now resembles the period before the 1930 depression. I stopped reading.  The fact that he still has an active fund, as well as a wide readership, says something about the kind of investment commentary that has longevity, despite the results.

The fund manager’s analysis is actually correct.  Interest rate cuts predominantly occur before bear markets. I’ve done the same analysis: in the last sixty years, the average change in S&P500 earnings 12 months after the first cut in a cycle has been -9.7%. Stock markets follow earnings, and US equities on average made final lows of -23%, 213 days after the first rate cut.

Further analysis from Strategas showed that only two times, 1981 and 1995, had positive earnings growth. The prevailing narrative by analysts is that the current environment most resembles the 1995 soft-landing scenario, which will lead to further highs in equities.

History suggests investors should be wary of rate cuts. But currently markets are cheering them for now, with the strongest performance during a US election year in recent history. Are all these views useful to an investor?

The most common question given any investment professional is ‘what do you think will happen in the future to markets/currencies/economy/a specific stock/etc.’ The person asking the question wants to hear something like ‘a rate cut is positive for stocks since it engineers a soft landing, so we see a further 10% upside until the end of the year’, which will make them them more confident about their current positioning.  However every person you ask will have a different answer.

The best answer I ever heard to this question was from one of the top hedge fund macro traders: ‘Nobody knows. I have a strong opinion on the direction of markets based on a deep analysis of historical data, tempered by the differences in the current situation. But it is weakly held, as the current situation may change. Such a change can cause me to completely reverse my view. And since you will not know when that may happen, you should not incorporate my view into your investments.  You should have a set of guidelines to form your own views, without needing to rely on what anyone else says.’

Changing one’s view on an investment outlook is often seen as negative. In my experience it’s a rarely held trait that is common to the best investors, as it allows them to respond to a rapidly changing financial market environment.

Everyone’s forecast is nothing more than today’s facts adjusted by a story about tomorrow. More fiction has been written in Excel than in Word. Everyone picks their own story: either what they want to believe will happen, or what they think makes the most sense.

Forecasts would be much more useful if they came with a warning label that assigned a probability to it. I remember at the end of 2022 a Bloomberg analysis put the probability of recession the following year at 100%, because leading economic indicators had never in history been this negative this long without a recession. The recession never came. We all prefer certainty and conviction in one’s investment views, but in this business nothing is ever 100%, and nothing is 0%.

The upcoming presidential elections are another frequently discussed topic. The more reliable polls put Trump slightly ahead. Investors who itch to trade are shown baskets of stocks that may do well under Trump, vs. ones that would do well under Harris. What is the probability of a Trump win? I’d guess around 55%. Accurate? Possibly. Useful? Probably not.

What about last month’s interest rate cut in the US? Much ink has been spilled on whether the Federal Reserve would cut 25 or 50 basis points. It was for half a percent, and stock markets cheered. The 1995 playbook looks to be unfolding according to schedule.

Was all the attention paid by investors reading all the opinions on what the Fed would do useful? Think back now on any time in the past where any Fed decision has made a difference to you. They all likely seem inconsequential now. This one will too in time.

Let’s take another example, China’s stimulus announcement at the end of September. The prevailing narrative was that China’s real estate debt problem was too deep, rendering the stock market un-investable. Significant stimulus would be needed by the government, but they repeatedly failed to deliver.

The announcement finally came, causing mainland China and Hong Kong stock markets to rally by over 20 per cent in just a few days. Hong Kong is now this year’s top performing stock market. Despite this the prevailing view post-stimulus announcement, at least from the research I’m reading, is that the actions taken by the China central bank are insufficient, and that they don’t compare to Europe’s ‘whatever it takes’ bazooka moment. But Europe was facing an existential crisis with the risk of a Eurozone breakup. China’s debt problems are significant, but likely not existential.

Instead of being confused by all these conflicting opinions, it is better to fall back on a small number of investment truisms. One that applies here is that bull markets are always born in an environment of deep skepticism.  Think about Bernanke’s widely ridiculed ‘economic green-shoots’ comment in 2009, and the doubt during the post-COVID rally while economies globally remained closed.

What about the outlook until the end of the year, especially with the risks of the most divisive US presidential election in recent history, which will be extremely close and highly contested by the loser. Investors cannot be faulted for being positioned more conservatively for this risk. And yet, US, Germany, Italy, Spain, and Australia are all at all-time highs. Most other countries are near their respective highs, and mainland China and Hong Kong have started to join the party. Despite the escalating conflict in the Middle East, oil prices are near multi-year lows. Another investment truism: look at markets’ actual price action, not what you wish to see.

I decided a year and a half ago that reading all this research, opinions, and views about the future was not only not useful, it was actively reducing investment performance. Instead I decided to fall back on a small number of investment market truisms that have stood the test of time, and the views of a very small number of writers that have consistently produced positive real world results.

The next time you hear a forecast/story about the future for any investment, you may be better off not paying too much heed to it.  A better strategy would be studying financial history, applying it to the current environment, and coming up with an educated forecast of what to expect in the future by putting a realistic probability on it – anything less than 70-80% confidence level is not worth acting upon, and investors would be better off sticking to a good well-planned investment strategy.