With so much going on, there’s been no lack of analyses of what to expect across various markets, and what investment actions you should take based on these forecasts.
The trouble is, it’s as devilishly difficult as ever to predict the future. For example, your psychic talents are far better than ours if you can predict exactly how Putin’s war is going to play out, let alone how its effects will converge with myriad others to drive future market pricing.
Moreover, those best positioned to offer the most informed insights about the future may be the voices you’re least likely to hear. Wharton Professor Phil Tetlock has dedicated much of his career to studying the efficacy of expert forecasters, and his research suggests as follows:
“People who generate better sound bites generate better media ratings, and that is what gets people promoted in the media business. So there is a bit of a perverse inverse relationship between having the skills that go into being a good forecaster and having the skills that go into being an effective media presence.”
If we look to the past, we can find ample evidence of just how hard it is to reliably anticipate various markets’ reactions to current events. Following are some relevant examples:
Global investing and inflation:
In their 2021 analysis, “US Inflation and Global Asset Returns,” Wei Dai and Mamdouh Medhat of Dimensional Fund Advisors studied how bonds, stocks, industry portfolios, factor premiums, commodities, and REITs performed during periods of high and low U.S. inflation from 1927–2020. They found that “most assets had positive average real returns in both low- and high-inflation years.”
Factor investing and economic cycles:
One of our timeless investment strategies is to allocate our portfolios across various market “factors,” or sources of expected return, in pursuit of particular long-term outcomes. In an Alpha Architect guest post, “Factor Investing Premiums and the Economic Cycle,” Swedroe also examined whether it had made good historical sense to shift those allocations in response to economic cycles. Bottom line, it had not. Compiling the findings from a number of academic studies, he concludes: “Although a factor’s return changes throughout the business cycle, the ability to predict economic regimes and alter factor allocations accordingly produces less successful results despite being intuitively pleasing.”
Bond investing and interest rates:
In “All Eyes on the Fed?” Dimensional Fund Advisors examined whether Federal target funds rate changes have influenced either global government bond returns, or longer- vs. shorter-duration bond returns. They concluded: “Our analysis of global government bond data from 1984–2021 shows no reliable relation between past changes in the federal funds rate and either future bond excess return over cash or future term premiums.”
Bond investing and interest rates (again):
You may recall, interest rates did tick upward in 2017–2018, creating concerns similar to those we’re hearing today. At the time, financial author Larry Swedroe published an ETF.com piece, “Rising Rates Increase Worries,” in which he illustrated why it’s best to disregard breaking news about rising rates (emphasis ours):
“As in 2018, we entered 2017 with the market anticipating several increases in the federal funds rate. … Despite that, the Vanguard Long-Term Treasury Index ETF (VGLT) returned 8.6% in 2017, outperforming the Vanguard Intermediate-Term Treasury Index ETF (VGIT), which returned 1.7% and the Vanguard Short-Term Treasury Index ETF (VGSH), which returned 0.0%. Investors scared off by the likelihood of rising rates suffered for betting against the collective wisdom of the market.”
Global investing and geopolitics:
Even if we can’t peer into the future, we can already see for ourselves the horrific toll Putin’s war is wreaking. Shouldn’t that translate into predictable “winning” and “losing” investments? Once again, the practical answer is no. In his recent work, “Chaos is a friend of mine,” financial columnist Bob Seawright points to a range of historical events demonstrating why complex adaptive systems like financial markets are essentially unpredictable. That’s thanks in large part to chaos theory (aka, “the butterfly effect”):
“Financial markets exhibit the kinds of behaviors that might be predicted by chaos theory … [E]ven tiny differences in initial conditions or infinitesimal changes to current, seemingly stable conditions, can result in monumentally different outcomes.”
In other words, news from the front lines may seem tremendous or trivial, awful or inspiring, or even everything at once. But avoid letting any of it heavily influence your actionable investment insights; the world is just too chaotic for that.
So what is an investor to do?
Big picture, we are continuing to deploy the same core principles we use to help people invest across time and through various market conditions. These include:
- Building and maintaining personalized investment portfolios of stocks, bonds, select alternative investments, and cash reserves
- Minimizing exposure to concentrated investment risks through global diversification
- Reducing the impulse to act on fear, excitement, and similar reactions to unfolding news
- Keeping an eye on tax ramifications and other costs
If anything, adhering to these timeless tenets becomes even more important during increased geopolitical uncertainty and economic stress and act to guide you past any bouts of doubt.