Future Schlock

One hoary axiom from Wall Street lore generally seen as incontrovertible is the market’s mystic ability to see over the time horizon some six to nine months out.  It is seen as a leading indicator which can tell us what will be happening in the future.  For those adept at reading such tea leaves, they can position their portfolios in advance and make bundles by being prescient.

Looking back over the past three years, we can get some sense of just how precise these forecasts can be.  Over that period markets have predicted five different breakdowns of the European common currency (the Euro), two double-dip recessions here in the U.S. and a couple of hard landings by the Chinese economy with its subsequent deleterious effect on global wealth.  Of course, the sage investor who follows such things may object than none of these tragic events actually happened.  Yeah, but such a string of failures won’t keep Mr. Market down for long.  He’ll no doubt be back soon to rearrange the deck chairs for the next titanic voyage into financial oblivion.

Mr. Market gets quite a bit of expert assistance.  After all, someone needs to interpret the smoke signals for those of us who are illiterate in such matters.  Every major financial firm offers up a plethora of analysts and economists who help us parse their reports.  Politicians of all stripes tell us what will go right if they get their way and, especially, what will go wrong if they don’t.  Central bankers around the world outline the problem and color in the spaces.  And an industrious financial press rails about the state of things from radios, television sets, periodicals, newsletters, blogs, tweets, you name it.

How helpful all of this proves to be is questionable in several respects.  First, given the incredible amount of data and opinions, sorting it all out so as to make it useful is a daunting challenge.  Subsequent application for portfolio creation can be even more difficult.  Perhaps most importantly, serious research by Professor Tetlock at Berkeley shows that all the experts combined can’t get it right even half the time.

What is an investor to do?  I wouldn’t advocate using a magic eight ball, but that almost makes as much sense as following advice from promoters of the stock of the week genre.  We believe that the herd mentality has some self-fulfilling attributes which provide clues to both short-term and more durable moves in various investment classes.  Right or wrong, when large amounts of money are moved in concert by opinion, they exert an effect.  With the proper tools, these trends become easier to spot.  This approach is generally referred to as momentum or relative strength portfolio construction.  While there is no perfect answer, we here at Atlas have found it to be a solution substantially more effective in making prognostications than is the local medium.