Predictably Unpredictable


October 23, 2017, by pathwise

Many of you may know that Arek had a chance in his previous life to spend some time on Wall Street. While the experience was immensely valuable, it’s likely not for the reasons that you would think. You see, much of his experience, our own research, as well as many academic studies show us that the markets are in fact predictably unpredictable. While you can have an amazing and well-paid career working on Wall Street, it’s unlikely that you’ll grow rich from being able to consistently predict what will happen in the markets. The reality is that the amount of moving pieces is incredibly large and diverse. Even incredibly powerful computer programs which can process data infinitely times faster than the human brain struggle with this. So now that we are at the last part of 2017, what are some examples of the recent “Wall Street” predictions that have gone horribly wrong? (Caveat: the firms and people working at them are incredibly smart and we in no way want to convey that we somehow think we are “smarter” than them. Rather our intention here is that even if you are incredibly smart and 100% of your job focus is on making 1-2 even short-term predictions, the reality is that it’s impossible to do so consistently. In fact, we feel that the worst and most dangerous aspect of this is when clients or Wall Street gurus do make the right call a few times in a row. This makes them seem like they truly can predict the future and the bets they place start to be larger and larger…..unfortunately, at some point this ends and usually ends very badly with lots of tears.)

1. The US Dollar was going to see massive strength: Goldman Sachs, a very well respected bank, considered this one of their top “ideas” for investors. Well, things didn’t pan out that way. The US Dollar is down just under 7% since the start of the year and Goldman Sachs gave up on this prediction around April.

2. Trump’s “America First” and rage against emerging markets were going to hammer emerging markets: Well…….not quite. So far, emerging markets have done about twice as well as US Markets in 2017.

3. Bonds would get hammered: There was a widespread discussion that with stimulus from the Trump presidency, the Fed raising rates, and an uptick in inflation, bond prices would feel the pain. While bonds certainly haven’t outperformed stocks, no one can argue that they were “hurt” recently either. In fact, a lack of progress on Trump’s policies and a lack of inflation have buoyed bond prices quite a bit…and again many Wall Street firms have now “adjusted” this prediction.

There are of course many more examples but hopefully, these drive home the point. Currently, there is widespread talk about US Stock valuations being at unsustainably high levels. Much of this talk creates anxiety for investors. They feel like they are missing out on something, or their portfolios will get affected if they don’t take some preventive action. We get it. We do this as a profession and Arek has worked directly on Wall Street, and we would be lying if we said that we never get “anxious.” Especially when we know our clients are anxious and our number one goal is to do right by our clients and for our clients. But we find our peace in all the work we do behind the scenes. We are here for you and happy to talk through any issues that may arise. Don’t be shy and don’t think you are “bothering us” when you need to talk through something…..that’s what we’re here for.