Year-End Predictions are Widespread, but Also Worthless

Five Things You Should Know

1. Equity Markets – finished mixed this week with U.S. stocks (S&P 500) rising 0.30% and international stocks (EAFE) falling -0.04%  
2. Fixed Income Markets – were mixed as well, with investment-grade bonds (AGG) up 0.09% while high-yield bonds (JNK) fell -0.12%
3. Jobs Report – The November U.S. labor report showed the U.S. economy added 199,000 jobs and the unemployment rate fell to 3.7%, a signal that the labor market remains resilient. While the report wasn’t strong enough to convince investors that future rate hikes may be on the table, it did temper expectations for an imminent rate cut. 
4. ECB Cuts – Recent signs point to the European Central Bank as the first central bank to consider lowering interest rates, with investors now pricing in 6 rate cuts in 2024 with the first starting in March. Economists have been quick to stem investor expectations, projecting the ECB will cut 3 times next year with the first coming in June.
5. Key Insight – [VIDEO] This week’s video features some highlights from this year’s client holiday party, along with one of our favorite traditions, finding out the special Christmas wishes from some of our younger guests in attendance. [ARTICLE] We take a look both at the market’s foolish attempts to predict what the Fed is likely to do in 2024, as well as some interesting statistics around the foolishness of attempting to predict/time markets in general.

INSIGHTS for INVESTORS  

The market continues to fixate on the Fed’s next move and seems to filter all data to gain any insights that it may hold. However, its effectiveness at doing so seems pretty suspect.

As reported by Bloomberg, Allianz Chief Economic Advisor Mohamed El-Erian believes the US Federal Reserve is losing control of its messaging on interest rates, but financial markets are wrong to expect imminent cuts.

“I do believe the Fed is done raising rates, but I don’t think that validates what is in the markets about rate cuts next year,” he said. “They still have a significant communication problem and they still have a credibility problem … The whole point of forward guidance is for the markets to listen to you and for the markets to do the heavy lifting for you. What we’re seeing now is forward guidance, as we saw last Friday, is being completely ignored by the market.” (emphasis added)

What is this guidance from Fed Chair Powell that the markets seem to be ignoring?

As summarized by commentator Larry Olewinski,

• Full effects of tightening likely not yet felt
• Committed to staying restrictive until inflation is on the path to 2%
• Premature to speculate on when policy may ease
• Fed is “prepared to tighten policy further if it becomes appropriate to do so.”
• FOMC moving carefully as risks become more balanced
• Risks of increasing too much or too little are ‘becoming more balanced’
• Fed policy rate is “well into restrictive territory”

Those attempting to trade or allocate on either the Fed’s statements or what they believe the market is “telling” them are likely to be disappointed. However, the desire to predict is deeply built into many investors’ psyche and the industry as a whole. This is despite a track record that is quite clear on anyone’s ability to do so.

David Kelley, Chief Global Strategist at JPMorgan Asset Management during his appearance on The Compound and Friends podcast commented on the year-end tradition of projecting the coming year’s returns, reinforced the need for investors to ignore such calls and “focus on what they need, rather than what they want.” He recognized people’s want/desire to know the future but pointed out the futility of such predictions and encouraged investors to instead focus on what they can control their plan and portfolio allocation – while noting that the latter should be built around long-term averages not short-term predictions.

The team at Avantis Funds put out the piece below showing “experts” inability to accurately forecast markets with a quick look at the last few years noting the median annual estimate was off by about 18 percentage points.

Bespoke: 12/5/23

The good news if investors simply give market time, the year-to-year uncertainty gives rise to some pretty strong probabilities of success as the next chart from their piece shows.

12/5/23 Data based on annual U.S. stock returns from 1928-2022. U.S. Stocks are represented by the Market Portfolio from Ken French’s Data Library. Return periods greater than one year are annualized. Rolling return analysis includes 95 1-year periods, 93 3-year periods, 91 5-year periods, 86 10-year periods, and 76 20-year periods. Past performance is no guarantee of future results.

Another great piece we came across this week on the importance of “fading one’s feelings” when it comes to predicting markets was from the team at Bespoke.

They noted, “An emotional investor typically feels good after-market up days and crappy after-market down days, but basically all of the stock market’s price gains over the last 40 years have come from the trading days that followed down days … The moral of the story?  Buy and hold obviously works best, but also: don’t let down days get you too down!”

This was their key takeaway after an analysis they did “Using the S&P 500 tracking ETF as a proxy for the US stock market dating back to the ETF’s inception in 1993, we wanted to see how an investor would have done if they only owned the market on the day after “up days” versus only owning the market on the day after “down days.”  The hypothetical strategy is pretty simple to calculate (and also not replicable without factoring in trading costs).  As shown below, over the last 40 years, had you only owned SPY on trading days that immediately followed down days for SPY (days where the ETF closed in the red), you’d be up 785%.  Conversely, had you done the opposite and only owned SPY on trading days that immediately followed up days for SPY (days where the ETF closed in the green), you’d be up a measly 16.7%.”

Speaking on counter-intuitive thinking and not “chasing hot markets” Marc Rowan, CEO of Apollo in a discussion with Bloomberg commented on the shifting dynamics of public markets and potential current within equity markets stating, “Look we’ve had a sea change not just over a year, we’ve had it over fifteen years. So much of our public markets are indexed and correlated, 80% of volume in the S&P 500, 60% of the market within ETFs, and 100% of our returns this year are from 10 stocks which constitute 35% of the S&P that trade at an average P/E (price to earnings ratio) of 50 times earnings. How many of us come in each day wanting to invest in companies that trade at 50 times earnings? Not many.”

So, while up days in the markets feel magnificent and the as often referenced in the media, the Magnificent 7 have had a wonderful 2023, the key takeaway from any and all of the above is that investing success is often very counter-intuitive and defined not by one’s predictive prowess but rather their patient discipline.

Such patience is best fueled with a good plan, partner, and understanding of history and we strive to play that role for you and your families to the best of our abilities.

Have a wonderful weekend,

Tim and the team at TEN Capital

Data, Just the Data

U.S. Jobless Claims – rose by 1,000 to 220,000 on the week ending December 2nd. This was slightly under market expectations of 222,000, however, marks the second-highest reading since September.  

U.S. ISM Manufacturing – increased to 48.30 points in November from 45.50 points in October of 2023. The average ISM Manufacturing New Orders in the United States has averaged 55.56 points since 1950 with the low reaching 24.20 in 1980.

U.S. MBA Mortgage Application – rose by 2.8% in the week ending December 1st, marking the fifth consecutive period of increase, which has pushed applications to their highest level in ten weeks as interest rates continued to fall.

UK Manufacturing PMI – was revised upwardly to 47.2 in November 2023, which surpassed the initial estimate of 46.7 and October’s 44.8. This latest reading is the highest point since April of 2023, although it indicates the 16th consecutive month of contraction in the manufacturing sector.  

Eurozone Retail Trading – in December, fell -2.7% MoM for a -2.8% YoY decline. Economists, polled by Reuters, had expected retail sales to fall 2.5% on the month and 2.7% year-on-year.