This is one I hear pretty frequently. Fred (to pick a name) hears a story on the radio or reads something in a magazine about expectations for the economy, stocks, bonds, whatever it may be. Based upon this story Fred wants to make drastic changes to his investments because “they are expecting” high oil prices, low oil prices, hyperinflation, deflation, a booming economy, the new great depression, etc., etc.
There are three problems. First, the ‘they’ that Fred is talking about is actually the writer of a story. It’s an opinion of one person. The writer may interview others, but usually that writer interviews the people who will reinforce the theme of the story. Second, that writer may have an axe to grind. They often have a preconceived idea and will present the facts that support it. Third, we are talking about the future here. The future is not in any way predictable. You can use what you know to give you a rough idea of what may happen, but that’s all it is, a ‘rough idea’ of what ‘may’ happen.
Let me give you an example from this week. In Barron’s, on page 4 there is an interview with an economist who believes that the stock market will collapse and head back below where it was in early March of this year. Pretty bleak stuff. But then on page 7 of the same publication there is an interview with a strategist who believes the stock market is the cheapest it’s been since the 1950s and will continue much higher. You couldn’t be much more bullish. These two completely opposite views in the same publication are only 3 pages apart.
Both of these stories use data to back up their predictions, making them sound almost inevitable. Yet the contrasts are startling. In the bearish story, the economist says the price earnings ratio for the stock market is 24 times. In the bullish story, a much more reasonable 15 times. They can’t even agree about a simple number like a ratio of profits to stock price.
When you read a story, or watch a ‘guru’ interviewed on TV, keep in mind that the future isn’t knowable regardless of how much a chart of 2009 looks like a chart of 1937 or 1982. Don’t let ‘they are expecting’ make you do something rash, positively or negatively.