Most forecasts of future stock market performance are based on either the idea that some metric or formula can predict where the market is heading or on the idea of reversion to the mean whereby stocks will inevitably return to their long-term returns of 8% to 10% (6%-7% after adjusting for inflation). The metrics crowd says they can predict the future based on...the percentage of new stock highs versus stock lows...comparing the current price earnings ratio with the historic P/E ratio...and dozens of other algorithms. However, a tidy paper produced by the people at Vanguard pretty much kills the metrics idea. They found that commonly used metrics and models had zero predictability over 1 year terms. Zero! For example, dividend yields and profit margins had lower correlations with stock market returns than comparing stock market movements with butter production in Bangladesh. Put simply, throwing darts will get you far more accurate results than listening to any of the talking heads on television.
What about reversion to the mean? If the long-term return of the stock market is 8% to 10% and we just finished a decade that averaged roughly a 0% return, shouldn’t the next 10 years be up? Maybe, maybe not. After the ‘80s stock markets averaged a 17% return for the decade the general prediction was that market returns in the ‘90s would be modest; however, the actual return was 18%. A few analysts did predict a lousy market for the first decade of the 21st century, which was correct, but does that mean that the next decade will be up and offset the previous down decade, or will the next decade be down because since 1981-2000 was so good that 2001-2020 just has to be bad?
The other reality is although financial markets do tend to comeback to the middle ground eventually – bubbles at some point will burst and a bear market will turn around and become a bull – it doesn’t always happen. As an example, the interest rate on bonds has been generally declining for the last 200 years; it is unlikely that bond yields will return to their 1853 level anytime soon. The other problem as shown above is if even there is a reversion to the mean how long will it take? The Japanese stock market hasn’t been over 30,000 since 1990 and the last time a British pound was worth $5 the Model T was still in production.
This uncertainty is why there is Safe Money Places®. The only financial tools discussed on Safe Money Places are those where principal is protected from market risk of loss. Yes, the yield on your certificate of deposit, fixed annuity or I Bond will fluctuate, but assuming you don’t choose to cash it in early you know your money will be there. Unfortunately, this certainty and safety makes Safe Money Places very boring to pundits and reporters so we don’t do a lot of interviews, but in times such as these we think boring is a good place to be.