2020 Outlook: Finding Perspective
At the start of every single year, it seems people are fascinated with two things: New Year’s Resolutions and forecasts. You can’t access any financial media channel without being bombarded with predictions. This doesn’t make sense when there is ample evidence that expert forecasts are correct only half of the time. That is why the famous economist John Kenneth Galbraith observed, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” With this said, why are we still attracted to forecasts?
Our brains are designed for planning, with a primary focus on our physical survival. We find contentment and peace in being able to consider a plan that keeps us out of danger. When the future looks uncertain, the brain looks to regain control and subconsciously is drawn toward opportunities for establishing a sense of certainty. This in part explains why we collectively engage in mass consumption of forecasts, especially confident ones, as they provide an illusion of certainty.
Thus, we are subconsciously attracted to forecasts, even though we consciously recognize that forecasts have not been very accurate historically. We try to overcome this problem consciously by putting more faith in forecasts that 1) confirm what we want to happen (confirmation bias), and 2) those that are stated more confidently by experts. But the data suggest these don’t improve the accuracy, only our perception of accuracy.
High Point Financial Design Forecast For 2020
We are confident in our forecast for 2020. To be fair, it is the same forecast we have believed in recent years and will likely be the same forecast in future years. There is no reason to change when the overall accuracy is close to 100%.
• The economy/market will do something that surprises us
• Investors who actively focus on watching the market will experience more stress and be less happy than those who don’t
• No one will be able to predict what will happen perfectly, but it will all seem obvious in hindsight
• You will be tempted to abandon your plan at some point based on a headline news story, expert forecasts, and/or short-term market performance
• Investors who focus on things they can control (i.e. your allocation and choices), will have a better financial experience than those who focus on what they cannot control or predict (i.e., what is the market going to “do” next?)
• Investors who abandon their plans, to chase a “hot investment” or “sure thing,” may have lower long-term returns than investors who stick with their plans
You may be frustrated that our forecast doesn’t say anything about where the market will go or tell you about the next great tech stock your brother-in-law keeps telling you to add to your investments. What our practice has learned is that the best results are obtained by those who have the discipline to ignore the distractions and short-term noise and stick with the plan we have developed together. We make our investment choices based on a systematic and non-emotional philosophy that allows us to adapt to markets. If you want to review or discuss your specific plan, just let our team know.
If after reading our forecast for 2020, you feel a need to consider more traditional financial observations, please feel free to explore the additional commentary below or if you are suffering from insomnia, feel free to read LPL’s full Outlook 2020 Outlook: Bringing Markets Into Focus.
We also believe the beginning of a new decade represents a time that is going to increasingly change the way we interact with others, the economy, and our world. Innovation that is on our radar includes but is not limited to: Healthcare Revolutions, Aerial Drone Systems, Bitcoin and Digital Wallets, 5G, Electric and Autonomous Vehicles, Non-Animal Proteins, Green Energy Initiatives, Enhanced Energy Storage, Improved Robotic Dexterity, Carbon Dioxide Catchers, Virtual Reality, Deep Learning, Next Generation DNA Sequencing, and of course every sci-fi fan’s biggest fear – Artificial Intelligence. So, we feel confident to predict that the world in 2030 is going to be a different than today in ways we can’t fully imagine.
In the year ahead, we are going to start sending out communication tailored to you in order to keep you updated on how changes in the world are going to impact your life. For today, welcome to the future!
Reminder – Investing is Always Uncomfortable
We believe that every year there will be news stories that scare us and volatility in the investment markets that we don’t like, as highlighted in the amazing visual below. While year to year, the markets will go up and down, the long term trend is positive and those that stick to an investment plan are often rewarded.
Advisor Capital, January 2020
Guru’s Garner Attention Selling Collapse
There comes a time for many when FOMO (Fear Of Missing Out) changes into what we jokingly call FONGO (Fear Of Never Getting Out). Many financial gurus take advantage of this by predicting the market is pending a crash. This happens when people try to extrapolate events from outside the market into a predictor of future happenings inside the market. Grand predictions that trigger fear can be a great way to gather attention in the world of social medial and 24/7 news. What we see instead is a stock market that’s a self-contained system, often behaving with apparently little concern to what is going on in the outside world. So, let’s take a moment to look at the results of listening to those who have predicted pending market crashes in the past decade.
For over a decade now, we have used the same systematic, disciplined, mathematical, rules-based approach for helping clients navigate the stock market. Currently, the market stays in a positive trend and we will continue to believe there are opportunities for growth.
Economic Update and Themes for 2020
The Top Themes as we enter 2020 are Volatility, Trade Policy Resolution with China, Federal Reserve’s Interest Rate Policy, Economic Strength and Encouraging Earnings Outlook for Corporate America, Impeachment & Election. Recessionary Fears.
Domestic: LPL’s research is expecting 1.75% U.S. GDP growth in 2020. This forecast reflects the potential for continued trade and geopolitical uncertainties and the gradual slowing of the economy at this point in the economic cycle. Slowing GDP growth at this point of the business cycle is to be expected and growth is still positive.
Global: Europe and Japan continue to struggle with trade uncertainty, geopolitical concerns, and sluggish growth. Confusion remains around the unwinding of Britain from the European Union and is something to watch along with general rise in populism in Europe. Central banks globally remain aggressive in keeping interest rates low. We are concerned with elevated tension in Iran and hope to avoid another middle east war.
Inflation: Consumer inflation has picked up slightly, and we believe inflation will continue to grow at a healthy, but manageable rate. The Fed targets an inflation rate of about 2% which generally indicates a healthy economy that is growing at a sustainable rate.
Employment: U.S. job growth has been steady, although recently it has started to show signs of moderating. Employment remains at under 4% and its natural for job growth to slow at this point in the economic cycle when we are near full employment.
Recession: Prolonged trade uncertainty and a highly contested U.S. election campaign season lead many to continue to speculate that a recession will start in 2020. This is the same prediction we have heard year after year. The strength of the US consumer and other economic data does not indicate this is probable at this point.
Bonds: Short-lived and shallow yield curve inversions are not worrisome in our view. The bond yields must be viewed in the context of the global fixed income market. There remains nearly $17 Trillion invested at negative interest rates where the lender in theory pays the borrow for the “privilege” of providing the loan.
Stocks: LPL expects U.S. equities to continue to have positive performance. They see more potential upside in emerging markets than developed international markets. Our Bull-Bear risk indicator we use to gauge market risk remains positive.
Impeachment & Election: Well, your guess might be as good as ours. There clearly are potential impacts depending on the direction the country goes on these two topics. Both are highly contentious and emotionally charged. The circumstances also change rapidly. We will continue to monitor and as the election approaches may provide more commentary on how elections are impacting the markets.
Our team has the benefit of perspective we gain from talking to successful business owners, families, investors, and fund managers. This keeps us acutely aware of how people are thinking and feeling. We understand that we suffer from “recency bias” and other mental investment traps that threaten our financial stability. We understand that, regardless if we are talking ocean waves, moon cycles, stages of life or stock prices, the natural order of the universe presents itself in waves. The big question is not what are we reading in the news, but how do we respond? Can we stay true to our values and disciplined to our investment strategy?
Yes, at some point the US will go into a recession and experience another bear market. Our belief, coupled with the current data, does not suggest it will start in 2020. In many ways, sentiment has turned more positive after a good start to 2020.
At High Point Financial Design, we believe it is important to focus on your time frame for cash needs and a commitment to discipline. We think it is appropriate to know where your cash needs will come from for the next 1-2 years. We will continue to manage as we always have in a systematic and adaptive process. If you, or people you care about, have questions about your financial health, please reach out to our team
We wish you all a prosperous, fulfilling, and happy 2020. Thank you for entrusting our team to help you use your money to pursue a more abundant life.