Our 2021 Market PredictionSubmitted by Moneywatch Advisors on January 5th, 2021
I am not a betting man. Now, I do enjoy perusing the betting lines on college and NFL football games and making some bets in my head, but my abysmal record helps me keep my money in my pocket. Similarly, I often get asked how I think the stock market will perform this year. When I answer that I have no clue how it will fare in the short term, I often receive a squinty-eyed stare in return. If I could read minds, I assume that look means, “Isn’t that your job?” Answer: No, the reason I can’t predict the market is that NO ONE can! Witness:
Barron’s, the investment magazine, solicited 10 investing strategists’ opinions on the performance of the stock market for 2020.
- Their predictions for the end of year value of the S&P 500 index ranged between 3000-3500;
- Actual finish? 3756.
- Their interest rate predictions as measured by the U.S. 10-year Treasury ranged from 1.5%-2.2%
- Actual finish? 0.92%.
Overall, analyst predictions miss the mark by an average of 12%, according to Paul Hickey of Bespoke Investment Group, who compiled data on predictions since 2000. To put a 12% miss into perspective, that’s like predicting 2 inches of snow and waking up to 14!
Some are worried the stock market is over-priced and set for a fall. Here is some perspective:
- The P/E Ratio of the S&P 500 Index (price to earnings ratio) is currently almost 38 – a year ago it was about 24. That means large U.S. stocks are much more expensive than they were just a year ago, relative to their earnings;
- The S&P 500 gained more than 10% in 2019 and 2020 and has posted double-digit gains three years in a row just 5 times since 1928. Can 2021 be the sixth?
- Is the bond market a better choice?
- The yield of the U.S. corporate bond index is 1.93%;
- Comparatively, the earnings ratio of the S&P 500 is $2.64;
- With interest rates so low switching to low-yielding bonds can be risky too, especially if one needs the higher long-term returns of stocks for retirement.
What to do:
So, if predicting the short-term performance of the stock and bond markets is a fool’s errand, how do we know how to invest?
- Focus on your goals:
- If you plan to withdraw money in the next 12 months, consider keeping part or all of that amount in cash;
- If saving and investing for retirement in the future – then focus on that goal. It’s somewhat counter-intuitive, but if you’re regularly contributing to your retirement plans, a down market is good – it allows you to buy investments when they’re on sale.
- Diversify your investments: (You already guessed I was going to say this, didn’t you?) A portfolio invested appropriately for your time horizon can help smooth out your ride.
- Take a moment and think about how you will feel if the markets take a dive:
- Will you panic and want to sell before things get worse? Or will the rational side of your brain prevail and recognize market downturns are as natural as the tides?
- If you invested $10,000 in the S&P 500 Index for the two decades from 2000 through 2019 it would have ballooned to $32,421;
- But, if you missed just the 10 best days of the market during that 20-year period – your $10k investment would have limped to $16,180 – half the value.
Timing the market – trying to sell at the peak and buying at the bottom – does not work. It may be boring to live beneath your means, save, and invest for your future self, but it works.
Steve Byars, CFP®