How Clear is Your Crystal Ball?

Given that the U.S. stock market has surpassed historical highs, news headlines are riddled with experts claiming stocks may be on the verge of a major correction. While these seemingly confident forecasts may grab our attention, they are nothing more than educated guesses. Matthew Boesler drives this point home with recent Business Insider column titled, “THE IDIOT-MAKER RALLY: Check out all of the gurus made to look like fools by this market.” It chronicles 36 separate doomsday calls by high-profile “experts” from March 2009 through the recent new market high.

Unfortunately, these erroneous forecasts are not limited to media sound bites; they also are delivered in the form of professional, paid advice. In early February, strategists at a global investment bank were becoming alarmed at political events in Europe, the sequestration “crisis” in the U.S. Congress, and what they saw as an unseemly rush into equities. The word went out to their clients to consider exiting stocks for the next one to six months.

A month later, however, the bank strategists¹ decided to reverse course. The problems in Europe, they now discerned, were not systemic, and the likelihood was that the Fed’s commitment to keep interest rates low would support investor sentiment globally. As a result, the experts told clients to cautiously re-enter the market over a number of months.

That’s a shame for those clients because, at the time of writing, the S&P 500 is up 9.9%, with major international stock indices also enjoying positive returns so far this year. The investment bank was not alone in changing its view.

In December 2011, Richard Russell, author of the investment newsletter, Dow Theory Letters, instructed his clients in unequivocal terms to “get out of stocks.”

“I believe we’re going to see a brutal stock market that will shock the Fed and the bulls and the public—and all who insist on remaining in this bear market,” he said.²

But 15 months later, Russell has changed his tune, telling his clients to buy stocks after a rally that has taken the broad U.S. market to more than double the levels prevailing at its bottom in March 2009.

“Yes, I know that this market is uncorrected during its long rise from the 2009 low, and I know that there are risks in buying an uncorrected advance that is becoming uncomfortably long in the tooth, but my suggestion is that my subscribers should take a chance (after all, Columbus took a chance),” Russell said in March 2013.³

And, this sort of commentary isn’t just happening in the U.S.

In December 2011, one of Australia’s most recognized market gurus, writer Alan Kohler, issued an ominous warning to his subscribers:

“The conditions are in place for a panic sell-off,” he said. “It is not certain that it will happen…but the risk is now such that you must take action. I will be significantly reducing my already reduced exposure to equities, possibly to zero.” ⁴

Explaining his mistake later, Kohler said he had not foreseen the extent to which central banks would continue to pump cheap money into the financial system. That’s all very well. But the fact is anyone who followed his advice and went to term deposits missed a rally in the Australian market of more than 20%.

Don’t Be Fooled

By constantly running stories focused on the short-term fluctuations of the market, the media creates the illusion that one must constantly adjust their investments in order to stay afloat. What the media doesn’t tell you is that they are simply attempting to capitalize on the natural human emotions of fear and greed to capture eyes and ears.

For investors, the lesson is that the closer you are to media and market noise, the harder it is to see the bigger picture. Don’t allow a market soothsayer to derail your financial future!

A better approach is to build a diversified portfolio of assets tailored to your needs and risk appetite. Disciplined rebalancing based on rules, not emotion, will help ensure that the short-term focus of the media does not undermine one’s financial goals.