Articles on investing and capital management, with a quantitative focus.

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Don't Believe the Forecasts


Analysts and economists frequently appear in the media, giving their forecasts for all kinds of things: recessions, inflation, interest rates, and even the stock market direction. Recently, they have been saying things like "this will be the last Fed rate hike", or "inflation will be back to normal in 2024". They often present convincing arguments to support their forecasts. However, you should not believe the forecasts; don't take them too seriously. Nobody can accurately forecast market conditions more than a couple months out.

If you're tempted to believe the forecasts, just remember how wrong the economists were in 2021 and 2022. Even with all the advanced models and real-time data, most economists did not foresee high inflation. After high inflation started, nearly all economists believed it would quickly end. When interest rates started to increase, most economists believed that rates would very quickly decline again. They were wrong.

Passive investing is based on the idea that we can't anticipate what the market will do in the immediate future, so it's best to hold positions for the very long term. I frequently remind myself that I have no idea what the market will do next. It's best to stick with my passive investment strategy and tune out the analysts.

Here are some of the topics that analysts pretend to understand. I have learned over 23 years of investing that the forecasts are mostly useless.


You might think that these are easy to forecast, but they are not. Recessions can only be seen in hindsight, after they have already occurred. Many analysts talk about recession indicators and predictors, such as an inverted yield curve. Historically, some indicators (like the inverted yield curve) tend to be followed by recessions. But whether you can effectively trade in and out of the stock market is a different matter.

Since the indicators are not perfect predictors, and because those indicators are already baked into stock prices, it probably is not a good idea to adjust your stock allocation because you anticipate a recession.

Peter Lynch once said: "Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves."


Nobody has any idea where inflation is headed. Inflation depends on a large number of complex factors and is partly a behavioural phenomenon.

Some economists argue that inflation is sure to come back down to normal, now that central banks have increased the policy interest rates. The CPI inflation readings are now trending lower. At first glance, it may seem that inflation is returning to normal.

However, the "core inflation" measures have only come down a bit from the high levels. For example, the US Core PCE inflation reading has been "stuck" at around 4.5% for one and a half years, with no significant declines this year.

Historically, inflation has been difficult to explain and forecast. Sometimes, inflation eases a bit and then resurges, so it's somewhat dangerous to assume that inflation is "done" just because the CPI is currently declining.

Stocks, Bonds, and Interest Rates

Nobody can accurately predict these. You should not trust any analyst who pretends to know how stocks will do over the next year. The same goes for bonds and interest rates.

Many people care about interest rates and mortgage rates because of the recent increase in borrowing costs. Unfortunately, these are just as difficult/impossible to forecast as the stock market.

Central bank policy rates will depend somewhat on inflation (which is impossible to forecast), but also depend on other things. The economists at the central banks are not any better at forecasting inflation and rates.

When you look at forecasts from the Bank of Canada or the Federal Reserve, I think it makes sense to look at the very short term (next few months). However, economists cannot see much beyond that.

Where will interest rates be next year? Nobody knows. Interest rates, and mortgage rates, could be higher or lower next year.

What Should I Do?

An investor should stick with their existing investment strategy. A typical stock/bond mix is already designed to handle the occasional recession.

Jem Berkes