Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Elections And The Markets: Forecasts Gone Wrong

November 8, 2018

The Wall Street Journal has an interesting column today. (Subscription required.) One of its market reporters explains that before the election he had worked out a scenario for the election results and what the market would do in response. He was right about how the election would turn out but completely wrong about how the markets would react.

In the column, he offers reasons why he might have been wrong. But he really doesn’t know why he was wrong, and says so. The lesson from this exercise is that it’s foolish to make market bets on short-term events such as election results. There are too many variables at work to have any confidence in a forecast. Besides, a lot of other people are doing the same thing by looking at the same information, so your forecast probably is already reflected in market prices.

I’m inclined to think both the first two explanations are right, and the obvious lesson is not to have too much confidence in one’s predictions of how the market will respond.

Even if you’re sure what will happen in some event, stocks might do something quite different. Moves in other assets can have big knock-on effects to the stock market. And anticipating how other investors will react—investors who are trying to predict each other’s reactions too—is typically more important in the short run than the true fundamental effects of whatever actually happens.

 

 

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