Well I got nothing against the press
They wouldn’t print it if it wasn’t true
-Joe Jackson, “Sunday Papers” (1979)

Readers of the popular and financial press could be forgiven for thinking that the stock market is more volatile than ever. In truth, volatility has mostly been hovering in the bottom quartile from a long-term, historical perspective, and U.S. stock prices in the aggregate are within a few percentage points of their all-time highs.

Reality aside, gloomy headlines and dire predictions have proliferated. Don’t let them throw you or your clients for a loop.There’s no shortage of examples of bold headlines about the economy and financial markets that proved–to put it charitably–overconfident.

Consider these ill-fated declarations:

  • “The end of cheap oil,”  National Geographic, June 2004. This prediction may have seemed prescient over the next four years, as the price of oil marched from $35 per barrel to more than $130 in mid-2008.¹ Since then? Not so much. The price of oil plummeted to less than $40 by the end of 2008, as the scope of the great financial crisis became clear. Another boom-and-bust cycle has since passed, leaving the price around $30 per barrel this year.

 

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  • “The death of equities,” BusinessWeek, August 1979. What can I say about this classic “Dewey beats Truman”-style headline that hasn’t been said? Perhaps just this: Stocks, as measured by the Wilshire 5000 Total Market Index, returned nearly 11.2%, annualized, between August 31, 1979, and February 29, 2016.² To be fair, a central thrust of the BusinessWeek article was that inflation was “killing equities.” The perspective is understandable. During the preceding ten years, the U.S. Consumer Price Index (CPI) had climbed at an annualized rate of nearly 7.1%.³ Alas, past performance proved to be no guarantee of future results. Over the following 36 years, the CPI climbed at an annualized rate of 3.3%. Thus, even on an inflation-adjusted basis, stock returns since the publication of this famous edition of BusinessWeek have been robust. To paraphrase Mark Twain, reports of the death of stocks have been greatly exaggerated.

 

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  • “The next hot growth stocks,” SmartMoney, March 2000. The editors of the now-defunct magazine assured readers that they’d unearthed “15 great tech stocks.” Oops. You’ll recall that air started rushing out of the bubble in technology, media, and telecommunications stocks that very month. Over the next 30 months, the tech-heavy Nasdaq Composite Index would shed 75% of its value.

 

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Poor predictions are not the province of the media alone, of course. Here are two more examples of certitude run amok:

  • Stocks have reached a “permanently high plateau.” Yale University economist Irving Fisher made this declaration⁴ just days before the beginning of the stock market crash of 1929. The Great Depression ensued.
  • Dow 36,000. James K. Glassman and Kevin A. Hassett published a book by that title in October 1999, arguing that the Dow Jones Industrial Average would reach that height within a few years. The Dow ended 1999 just below 11,000. It has since touched a low of about 7,000 (in early 2009) and a high of roughly 18,000 (in early 2015). A decade later, to settle a bet with a skeptical reader of The Atlantic magazine, which published an article with the same title in September 1999, the authors donated $1,000 each to charity.⁵

I could go on, of course, citing less-than-prescient financial remarks from all manner of luminaries, including presidents of the United States and Federal Reserve chairs. I’ll spare you.

If you are a financial advisor who entrusts client assets to us, I hope you have a good hunch about how I’m going to conclude. The future, being unknowable, deserves deference, and the states of the economy and financial markets are beyond investors’ control.

What to do?

Make well-considered financial plans that reflect your clients’ goals, tolerance for risk, and other personal circumstances. Build and maintain balanced, broadly diversified, low-cost investment portfolios. And focus on the long term, recognizing that investment horizons–even those of retirees–are often years- or even decades-long.

Having done all those easy-to-say but sometimes tricky-to-do things, I’d suggest once again that you and your clients take it easy.

¹ U.S. Energy Information Administration via the Federal Reserve Bank of St. Louis. Based on the average monthly price of North Sea Brent crude.
² Vanguard, based on data from FactSet Research Systems.
³ Vanguard, based on data from the Federal Reserve Bank of St. Louis.
⁴ Robert L. Heilbroner, 1967.The worldly philosophers. New York: Simon & Schuster, p. 228.
⁵ Dow loses points, but reader wins 10-year-old bet, 2010. The Atlantic. Accessed February 19, 2016, at http://www.theatlantic.com/magazine/archive/2010/05/letters-to-the-editor/308013/.

Notes:

  • Past performance is no guarantee of future results.
  • All investing is subject to risk.