“It’s hard to make predictions, especially about the future.”*
We can't predict what the year will bring any more than anyone else. Our crystal ball is cloudy enough, so it is with great empathy that we draw your attention to the misfortune of other would-be fortune tellers.
1. The Insiders
Despite vast resources–unlimited data and highly-educated, highly-paid talent–Wall Street consistently fails to predict next year’s stock market returns (jagged line) with any reasonable accuracy. Wait a minute, you say! Nobody takes these predictions seriously, not even the banks themselves. These forecasts are for entertainment purposes only, and most financial pundits just try to land somewhere in middle of the pack. Surely when real money is at stake the Wisdom of Crowds should send a clearer signal.
2. The Market
Not so much! Even with trillions of Skin in the Game, market participants consistently over-estimate and under-estimate the future Fed funds rates (dark line)–the most important number in global financial markets! One might suggest “muscle memory” plays a role here (client letter, October 19). [See also: “A Flaw in Human Judgment.”] Whatever the cause, there's a lot of hair on these forecasts!
3. The Watchmakers
Officials at the almighty Federal Reserve make and revise their predictions of the same Fed Funds rate (solid line)–a rate they go on to set themselves! This should be easier than knowing what they’ll have for breakfast, but mornings have been...interesting lately.
Outside of financial markets, which clairvoyants predicted the military quagmire in the former Soviet Union, the overturning of the chess board in the Middle East, or the huge shifts in electoral politics across the globe? And which forecasters are bold enough to say how events will unfold in the coming year? [Narrator: none and almost all, in that order.]
Which investors in 2008 could have known that the US stock market would massively outperform the rest of the world for the next 15 years? That the price-to-earnings (P/E) ratio for the S&P 500 would rise from 7.4 in 1980 to 27.5 as we go to press? That the Fed Funds rate would plummet from 20% in 1980 to zero 40 years later? With hindsight and the fortitude to weather the occasional tsunami, a 100% investment in US stocks (exclusively tech stocks for storm lovers) looks pretty good–from the 1980s until now (and last year)!
Not us, and (to our knowledge) almost nobody else. "Super" forecasters come and go: what passes for genius one year seems like dumb luck sooner or later. Whichever of the many possible futures awaits us, our mission at Magnolia is to help our clients prepare and to prosper. The surest form of preparation in an investment portfolio is meaningful diversification, which by definition means never allocating to the highest-performing asset (in retrospect) in any year. Only 20/20 hindsight can eliminate this feature. [See “The Only Free Lunch?” ]
In a year when the US stock market stunned insiders (and us) with its strong performance, diversified exposure to global markets was a drag on relative performance. [See “Think Global.”] However, other diversifying strategies quietly delivered the goods: gold was up 26% on the year, investments in real assets performed well, and selective allocation to private markets added diversification and enhanced returns. [See “Private Markets: The Velvet Rope.”]
By now, we may have disappointed our readers by making no predictions for 2025, so we’ll offer one: the future will be different than the past, and it will make the experts look foolish. We wish you a happy and prosperous New Year!
*Yogi Berra (maybe)
Footnote: many people are willing to make predictions. Here are a few:
2025 Outlooks
Vanguard - Vanguard economic and market outlook for 2025: Beyond the landing Link
Robeco - 5-Year Expected Returns: Atlas Lifted Link
KKR - 2025 Outlook: Glass Still Half Full Link
Cambridge Associates - 2025 Outlook Link
J.P. Morgan Asset Management - 2025 Year-Ahead Investment Outlook: Out of the Cyclical Storm and into the Policy Fog Link
Goldman Sachs - Macro Outlook: Tailwinds (Probably) Trump Tariffs Link
Goldman Sachs - Global Equity Outlook: The Year of the Alpha Bet Link
Richard Bernstein Advisors - Certainties for an uncertain world Link
Charles Schwab - 2025 U.S. Stocks and Economy Outlook Link
UBS - The CEO Macro Briefing Book: 12 Questions Ahead of 2025 Link
Apollo - 2025 Economic Outlook: Firing on All Cylinders Link
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