Swedroe: The Only Reliable Prediction

July 12, 2017

As readers of my books and articles know, I don’t participate in the game of making predictions. Whenever I am asked for a forecast about the economy or the markets, my standard response is that, while I might have my own personal views, I’ve learned there are no clear crystal balls.

In fact, the academic research on the subject has concluded that there are no good forecasters. That knowledge is why I don’t make investment decisions based on my personal views. I’ve no reason to believe I’m likely to succeed where others have failed.

However, I make one exception to this rule. There’s one forecast I know I can make with the same certainty I have about the sun rising in the east. I know—for certain—that, at the end of each year, active managers will come up with an excuse for their failure to outperform index funds.

They’ll also predict that next year will be different: It’ll be a “stock-picker’s year.” I have yet to be disappointed with this forecast, with the following being a good example of why.

The End Of Macro?

I was recently stuck at home dealing with a bout of the flu. With some time on my hands, I decided to dig into my collection of what I refer to as “investment porn” (to borrow a term from author Jane Bryant Quinn). I found a December 2012 article headlined “The Era of 'Macro' May Finally Be Coming to An End.”

The author quoted Bank of America’s Chief Investment Strategist: “The pair-wise correlations of all S&P 500 stock combinations has fallen to 30%, down from a high of 70% in 2011. This indicates that we are close to being in a differentiated/stock picker’s market.”

A chart was then presented showing the historical evidence on the correlations of all possible pairs of the stocks within the S&P 500 Index from 1986 through 2012. A line was drawn in at the 25% level. When correlations are below that figure, it’s supposed to indicate a stock picker’s market (the term being used to indicate the times when it will pay to be a good stock selector). Unfortunately, there’s no evidence to support that statement.


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