Predicting the past, not the future

Dire predictions abound these days from Jamie Dimon on down about the storm that is brewing just offshore, ready to sweep us all away in a tidal wave of inflation or recession or depression or all of the above. From the sound of it one might conclude that the only safe place right now is cash, and given a potential “economic hurricane” we might not even too sure about that!

After a market decline, economists crop up predicting the chance of a recession across platforms. They describe our destiny in grim tones, as if an asteroid is about to obliterate the earth. I understand that paying more at the gas pump and the grocery store is painful, but is a recession really the equivalent of planetary disaster? And does worrying about a potential recession provide any helpful information to investors?

Michel de Montaigne, a famous French philosopher once said, “My life has been filled with terrible misfortunes, most of which never happened…” I think the same might be true for the market forecasts of today. We hear the experts calculating the odds of a recession coming, but do most actually say it’s a slam dunk? No, they don’t, because if we look across the board of most forecasters the average prediction for a recession is around a 44% chance according to the Wall Street Journal and many are still in the 30 to 40 % range. That means if we take economic forecasts seriously then there is at least a better than 50% chance that there’s no recession ahead. I don’t know. If the weatherman said there was a 50% chance of rain it might cause me to bring an umbrella but would it make me board up my house? And is a recession like a hurricane or more like a thunderstorm?

The next time you hear a dire forecast, here are some things to keep in mind

  1. What most people don’t realize is that the market often operates three to six months ahead and sometimes longer. Most predictions of doom and destruction are made after the market has already dropped, so in reality, forecasters are predicting the past. We might be a little more grateful if somebody had said “look out!” in advance, but three to six months later doesn’t really do us much good.
  2. History suggests most recessions last less than a year and the decline is between 20 and 30% so if the market has already gone down about that much, should we start thinking ahead as the market is likely to do?
  3. The stock market does not wait for reports from the government, it acts in real time. So, if the economy is going to weaken, the market will head down as it anticipates it and by the time these late reports announce an official recession, most of the time the market is already looking forward to the recovery.

So, if there is a big bad wolf out there, it’s probably not a recession, but just the futurists huffing and puffing about what’s already happened. Don’t let them blow your house down. If there are genuine indicators we should consider when preparing for market decline, then fine. But we should always be prepared for the possibility of a downturn, because there is never a 0% chance of rain in the market climate. That doesn’t mean though, that we need to live our financial lives in the storm shelter.


Nice thoughts!!

But the post might not age too well.

Dont fight the FED.


Welcome to the Fool and to METaR!

Nice post but a hard sell at METaR.

The Captain

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Welcome to METAR with a well-thought-out post.

METAR welcomes all investment outlooks. We’ll add you to the “bullish” side. :slight_smile:


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