It's that time again, when everyone releases their year-end investment outlooks and predictions. In fact, the only thing that will show up in your inbox more frequently than investment outlooks will be articles about how you can safely ignore them. The complaints usually claim that markets are unpredictable and nothing destroys portfolio assets faster than random guesses from know-nothing market pundits. Whether this is a genuine warning or just a chance to sound snarky and contrarian, a cottage industry has developed to protect investors from the evils of annual market outlooks.

As a producer of such commentary, I have mixed feelings on the subject, but with that caveat, here’s my take on the pros and cons of market predictions.

Let's start with the downside: pure market predictions are pretty useless. These are usually declarative sentences, or worse, point estimates that ooze with certainty. But guesses dressed up with confident language are still guesses. Examples of this include "Double-digit returns for stocks!" or "Gold to finish 2018 at $2500/oz." Point estimates give an air of authority but fundamentally miss the point; all good predictions are probabilistic, because outside of math and physics, little is known with certainty. Be wary of statements asserting that something either will or won't happen. [Yes, I understand why investors and the financial media crave the appearance of certainty and I fall into this trap from time to time as well.] However, I believe the best forecasts acknowledge uncertainty and are tempered by probabilities. Some things may be more or less likely to happen, but nothing is guaranteed.

Beyond the Headlines
Now for the upside: The most valuable element of an investment outlook is the rationale for the opinion. I don't care what you think, I care why you think it. All forward-looking commentary provides an opportunity to evaluate the author's rationale relative to your own understanding of market circumstances and dynamics. Is it logical? Is the fact pattern consistent? Is the view already priced in? Does the view follow from the argument presented? The real insight for investors lies in the author’s reasoning, not in shrill predictions.

When I wrote our market outlook for 2019, I argued that the global economy was decelerating, US equity earnings would still be up 5%–7%, and that stocks could grind a bit higher but outsized gains are unlikely. I have no idea if that means +3%, +4%, or +5%. Our business doesn't lend itself to this level of precision. (Again, beware of point estimates.) I would expect readers to assess our rationale and the quality of the argument presented. Is the global economy decelerating? How will this feed (if at all) into earnings? Will valuation multiples expand or contract? Have we over- or underestimated the effects of trade and tariffs? And so on…

If Not Science, Then What?
So if market prognostications are an inexact science, perhaps it is just best to ignore them. Eschew the pundits, buy and hold, and take a long-term view – or so the classic theory goes. While tempting, this strikes me as a flawed argument. All portfolio investments are effectively "bets." For example, if you invest in stocks "for the long run" and buy/hold/rebalance, you've made an implicit bet that equity returns will be higher than other assets over the long haul – along with a host of other assumptions. The fact that your investment wasn't justified in advance by an explicit forecast or prediction is irrelevant. An implicit guess is still a guess. On the other hand, a forecast with a well-constructed rationale is an educated guess – one that may provide additional insights. In this era of transparency and fiduciary responsibility, investment professionals should value a thoughtful rationale – imperfect as it may be – to support their portfolio allocations.

Recommended Reading
So if you have the inclination, read the outlooks you can – particularly those from people who challenge your point of view. But do it with a healthy dose of skepticism. Markets are highly unpredictable. We're all guessing to some extent – judge us by the quality of our arguments.
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The views and opinions expressed are as of December 12, 2018, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

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