Market Forecasters: Modern-Day Diviners
I was recently reading about Herodotus and his written work, The Histories. Herodotus was born in the fifth century b.c. and was a chronicler of various major events throughout his life. While his book contains some faithful representations of history, it is also filled with legends and folk tales of his era. However, as Herodotus describes ancient battles, he mentions a unique decision-making process employed by generals while contemplating whether to attack the enemy position or wait until another day. These decision-making tools were people known as “diviners.”
Generals would consult their diviners, such as the famous ones of Apollo or Delphi, who would read omens from the livers of animal sacrifices to search for unfavorable signs that would delay an upcoming battle. Waiting for the bad omen to pass, enemies were given time to assemble, form ranks, and be ready for engagement. Since the end of the Peloponnesian Wars, diviners have faded away to history as generals developed more rational strategies and military sciences. Nonetheless, we still have “diviners” present in our lives today. Turn on CNBC and watch Jim Cramer’s Mad Money discuss when to hold capital or employ it, or subscribe to a newsletter of a well-dressed, smiling strategist who sends out their best stock picks and ideas to you. Go to a Wall Street research firm and read their next year's outlook. You’ve found the diviners.
On December 31, 2018, the Fed Fund Rate sat at 2.5%. The diviners confidently shared their views:
“We expect three Federal Reserve Bank rate hikes in 2019” – Goldman Sachs, 2019 Annual Outlook
“The Fed may raise rates anywhere from zero to three more times in 2019” – Capital Group, 2019 Annual Outlook
“Fed fund rate of 2.75% - 3.00%” – Wells Fargo, 2019 Annual Outlook (implying 1-3 hikes)
“The Fed should continue to raise rates early in 2019, adding two more rate hikes by mid-summer and pushing the federal funds rate to a range of 2.75%-3.00%.” – JPMorgan, 2019 Annual Outlook
How did these modern-day diviners do? Not good. The current federal funds rate remained at 2.5% in the last FOMC meeting in June. The Fed also signaled it would keep rates steady at around 2.5% through 2021 and may even lower rates if the economy deteriorates. In fact, the futures markets are indicating expected rate decreases. These diviners come from billion-dollar firms with massive research groups who meet with the federal reserve, and they were still wrong. Why do they still create outlooks? It’s good marketing and attracts business. A more important question: why do we want to listen to them?
We don’t seek advice from the diviners. Or pretend to be one. Instead, we build portfolios that are evidence-based relying on data and well-researched statistics. Portfolios that, over the long run, have exhibited predictable risk, strong diversification, and good compensation for the risk taken. Remain disciplined to a plan. Don’t exit the market because the diviners are reading bad omens. If you stepped out after the May down markets à la “sell in May and go away,” you may have missed the “Best June for the Dow since 1938.”