Gravity

Punxsutawney Phil has been in the forecasting business longer than any money manager on the planet. Sadly, his long track record is rather mediocre. The 39% success rate¹ would have maybe qualified Phil to receive a hapless two star rating from Morningstar. 

Based on such a record, I would not put much weight in Phil’s predictions, but since hope springs eternal, his call for warmer weather coming sooner rather than later, sounds too good to pass up.

To help things along and get in the spirit, I started my office’s spring cleaning early this year. I always find long forgotten but interesting things while tidying up. This time I found two books making bold market predictions:

• The Roaring 2000s – Building the Wealth and Lifestyle You Desire in the Greatest Boom in History by Harry S. Dent

• Dow 36,000 – The New Strategy for Profiting from the Coming Rise in the Stock Market by James K. Glassman and Kevin A. Hassett

The books were published in 1998 and 1999 respectively – go figure: right around the high point of the dot-com bubble. Needless to say the predictions made could have hardly been more wrong. By comparison, Punxsutawney Phil’s forecasting abilities don’t seem so bad after all.

How can reputable professionals perform significantly worse than a furry rodent with below average predictive ability?

Hope springs eternal and gravity defying predictions can always be justified with some variety of the “this time is different” argument. While many things may indeed change, gravity remains as eternal as hope. Gravity ensures that a pendulum can only swing so far in one direction before reversing trend. In the investment world, yesterday’s heroes generally become tomorrow’s zeroes and vice versa.

A recent study by Standard & Poor’s illustrates this point well. In the Nineties stocks did significantly better than bonds. Gold had actually lost value. Technology and Financials stocks were the darlings of the decade.

In the 2000’s the hierarchy was reversed. Bonds did better than stocks, gold beat everything in sight, while Technology and Financials were the worst performing sectors.

Will the pendulum swing the other way over the next decade? Will stocks do better than bonds? Will gold be forgotten? Will the healthcare sector, the laggard of last decade, top the stock charts? The laws of gravity tell us it is possible.

Investors do not have the luxury to wait until 2021 to know for sure, but respecting the laws of gravity increases the odds of success.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise.

Andrei Voicu is a Managing Director and Chief Investment Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. He is also a registered representative with LPL Financial. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at blog@fragassoadvisors.com. Andrei can also be reached for comment at 412-227-3200 Fee-based investment management and securities offered through LPL Financial. Member FINRA/SIPC.