“Postelection Blues” and Forecasting

Good Morning Relaxing Retirement Member,

The lead article in the Investing section of Monday’s Wall Street Journal was titled, “Postelection Blues: Stocks Rise Before Elections, Then Often Slow.”

The article then goes on to cite:

The Dow Jones Industrial Average does show definite patterns over the last 120 years that are now worth heeding. The main one is that the stock market tends to be more buoyant preceding presidential elections, but usually performs weaker afterward. In the 12-month periods leading up to 30 Presidential Election days beginning in 1900, the Dow climbed 23 times with an average gain of 9.0%.

But in the one year periods following elections, the median gain was less than half as much, 4.4%. The Dow rose five fewer times.”

The article continues onto two pages with more of the same, ending with: “it is possible that the year ahead could deviate from the historical pattern. Time will tell.”

Two Questions for You

First, armed with this incredibly compelling information, did you contemplate altering your investment strategy?

I would hope not!

How could it? It doesn’t provide any information with which to act. And, that is the litmus test I recommend when deciding on what to pay attention to and what to not waste your time reading.

More important, now that the election is over, all the predictions and forecasts have come pouring in from all the “financial experts” on what will happen with markets.

The question you have to ask yourself is why do we pay so much attention to financial data and “expert” predictions?

After all, as mid-twentieth century economist John Kenneth Galbraith once said, “the only function of economic forecasting is to make astrology look respectable!”

If you’ve paid attention to economists and their predictions for any length of time, the only conclusion you can arrive at is that they are wrong far more than they are right. It’s not even a little bit close.

If that’s true, then why does the financial media constantly agonize over every slight movement up or down in dozens of economic indicators, including presidential election results?

This is a very, very important question.

Think about it. We all labor under the delusion that if we can somehow figure out what the economy is going to do next, we can then anticipate how markets will respond.

In other words, we study the economy, not as intellectual entertainment for its own sake, but as a predictor of markets.

A False Premise

Let’s take a moment to break this down to see just how intelligent this activity is.

For starters, the premise is, “if we can figure out what the ‘economy’ is going to do next.”

We can’t!

No one ever has with any consistency. That’s what Galbraith was trying to tell us. Therefore, any conclusion we draw from this premise will be wrong no matter what it is.

But, for fun, let’s assume that we could anticipate the economy in the short to intermediate term just once in our investing careers. We would still have no earthly reason to suppose that we had a handle on the trajectory of the stock market’s next important move.

For very recent historical perspective, let’s go back and examine the incredible disconnect between U.S. GDP (gross domestic product) and the stock market since the end of the Great Recession in 2009.

The S&P 500 stock market index bottomed out at 677 in March 2009, anticipating the end of the recession, which the National Bureau of Economic Research says took place in June of that year.

Assume, for a moment, that sometime between March and June of that year you asked a prominent economist what GDP growth was going to be in the next seven years, and by some miracle, he knew.

He would have told you that GDP growth was going to range between one and two percent a year, and that unemployment would never get below seven percent over the next four years.

In response to that forecast of a painfully slow economic recovery, you would have likely concluded that stock market prices couldn’t possibly gather any real steam given this forecast of an economy that’s virtually on life support.

And, the “logical” conclusion from this forecast is that you would have decided to keep your investments in cash until the economy gives you much stronger signals.

Given that those “signals” you were looking for never presented themselves during the ensuing seven years, in all likelihood you’d still be holding everything in cash meaning you would have missed one of the great market recoveries not just of our time, but of all time!

In Spite of the Economy

Stock prices didn’t rise in response to the economy, but in spite of it.

They went up in response to the same forces which have always driven them in the long run: the dramatic post-crisis increases in corporate earnings, cash flows, dividends and cash positions.

The lesson to be learned about this is that long term, goal focused, patient, disciplined investors learn over time to tune out all economic reporting and current events including election results prognosticators.

That flies in the face of the message you hear from the dominant media culture, and likely among the majority of those you interact with.

However, what any objective and rationally thinking individual has discovered through painful trial and error is that not only won’t the economy tell us what market prices are going to do. The economy won’t even tell us what it’s going to do!

Control What You Can Control

As Warren Buffet said, “Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try and dance in and out of it based upon the turn of tarot cards, the prediction of “experts”, or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

The bottom line is that it’s fruitless to agonize over what the stock market is going to do in near future.

In the short run, it’s always been completely irrelevant to your financial future.

Instead, focus on what you can control.

Committed to Your Relaxing Retirement,

Jack Phelps

The Retirement Coach
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I appreciate the trust you place in me. Thank you!
(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)