March 9, 2015

The Markets

Last week was one of those weeks: When good news triggered not-so-good news. According to Barron’s:

“The February jobs report, showing a 295,000 gain in nonfarm payrolls, about 60,000 more than predicted by economists, plus a dip in the unemployment rate to 5.5 percent evidently was enough to convince the markets that a June Fed rate hike is now likely.”

Reuters reported the good news: A stronger U.S. economy is better for U.S. stock markets over the long term. It also gave the not-so-good news: Investors’ worries the Fed could choke economic growth by raising rates too soon led to a market selloff.

The Crystal Ball

Do you know who Irving Fisher was? The Library of Economics and Liberty described him as:

“…one of America’s greatest mathematical economists and one of the clearest economics writers of all time. He had the intellect to use mathematics in virtually all his theories and the good sense to introduce it only after he had clearly explained the central principles in words. And he explained very well. Fisher’s Theory of Interest is written so clearly that graduate economics students can read – and understand – half the book in one sitting, something unheard of in technical economics.”

Unfortunately, he is also known for saying, “Stocks have reached what looks like a permanently high plateau,” on October 15, 1929. Just a few weeks later, the market crashed along with Fisher’s credibility.

This is but one tale of our dismal ability to forecast. Regardless, we continue to try. Consider 2014. The Wall Street Journal’s survey of economists predicted 10-year Treasury rates would move higher (a unanimous opinion). There was good reason for analysts to forecast higher rates, but markets are complex and rates fell during the year. Survey participants predicted 10-year Treasury rates would finish at 3.52 percent. They finished at 2.17 percent.

Survey participants also anticipated crude oil would finish the year at about $95 a barrel. There was little reason for anyone to suspect a significant drop in oil prices when demand for energy is relatively strong around the world. Regardless, the final closing price per barrel was about $53.

So, when people whose jobs involve tracking economic events and financial markets find it difficult to interpret how markets may perform, what are investors supposed to do? It is felt they should remain committed to investing best practices, which include prioritizing financial goals, maintaining well-allocated portfolios, managing risk, and talking with their financial advisors.

Weekly Focus

“We make a living by what we get; we make a life by what we give.”
-Ronald Reagan

Photo courtesy of Perpetual Tourist, used in accordance with the Creative Commons 2.0 Generic license.

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