You want to make the most of your financial resources, and knowing what lies ahead in the stock market would make you sleep better at night. That’s why you might be hearing terms like “future indicators” or “stock market forecast.” And that’s probably why you are reading this blog.
Can you trust the stock market forecast for 2020? Who knows. But that doesn’t mean you’re flying blind into the next decade. You can still sleep better at night. We’ll explain how.
What is a Stock Market Forecast?
In the new year, you may see the occasional headline about the “January Indicators” or “January Barometer.” This theory suggests that the movement of the S&P 500 (up or down) during the month of January may signal whether that index will rise or fall during the remainder of the year. In other words, if stocks go down early in the year, this would supposedly foreshadow a fall for the stock market for the remainder of the year, and vice versa if returns are positive. You’ll hear the word “forecast” throughout the year as well, the hope being that if an investor can time his actions well, he can earn more and loss less. That’s just not a wise approach.
Can I Rely on Market Forecasts?
So can a month or two of returns in the market really set the stage for an entire year? Let’s look at history to find out.
In the monthly returns of the S&P 500 Index for each January since 1926, compared to the rest of the year, a negative return in January was followed by a positive 11-month return about 60% of the time. And those 11 months combined had an average return of around 7%.
Take 2016, for example. The return of the S&P 500 during the first two weeks was the worst on record for that period, at -7.93%. Even with positive returns toward the end of the month, the S&P 500 returned -4.96% in January 2016, the ninth-worst January return observed from 1926 to 2017. If you stop there, you would sell your stocks every December and hop back in after the month of December. But a subsequent rebound of 18% from February to December resulted in a total calendar year return of almost 13%.
What does that mean for you? An investor reacting to January’s performance by selling out of stocks would have missed out on the gains experienced by investors who stuck it out for the whole year. Market forecasts are a lot like weather forecasts—they’re highly speculative. And you shouldn’t plan your future around them.
Our colleague Larry Swedroe demonstrates often that there’s a large body of evidence demonstrating that market forecasts have no value—the accuracy of forecasts is no better than one would randomly expect. So why bother listening to the so-called gurus or experts?
A Better Approach to Investing
Over the long term, the financial markets have rewarded investors. People expect a positive return on the money they invest, and historically, the markets have provided meaningful growth of wealth—over time. As you invest in 2020, remember that frequent changes to an investment strategy can hurt its performance. Rather than trying to beat the market based on hunches, headlines, or indicators, remain disciplined and let markets work for you. Stay the course, no matter what kind of rollercoaster ride the markets take you on.
Another important aspect of smart investing is working with an advisor to create a time-tested plan for building wealth. Here at Cogent, we want to help you build your wealth so you can enjoy the life you deserve. Call us today and let us set you up for long-term financial success.