The stock market boom that no-one predicted
Can you guess how much the sharemarket has risen in less than 12 months? How are those house-price crash predictions going? About as well as the forecasts of the stock market's demise, I suspect.
Ah predictions. As Galbraith once said: “Pundits forecast not because they know, but because they are asked.” You know the sort – the bigger the wild prediction, the more likely it will end up in the business pages. And if it is a negative prediction, all the better.
Despite all the negative predictions, the S&P/ASX 200 Index is up almost 31% since the pre-Christmas low last year.Credit:James Alcock
However, when time passes and the prediction is proven incorrect? Crickets!!
Take the house-price crash brigade. Most of them have been bearish for well over a decade, during which time house prices in our capital cities have ballooned to such an extent that even a 30 per cent, 40 per cent or, in some cases, 50 per cent price fall still wouldn’t take you back to square one.
Even if the prognosticators are eventually proven right, you still would have been better off to ignore them and buy anyway.
Which leads me to my own area of expertise; shares.
No, I didn’t make any outlandish predictions that I got right this year. I don’t do predictions.
And no, I’m not going to tell you about the so-called experts who predicted sharemarket crashes in 2016, 2017, 2018 and 2019, and will likely do it again in 2020.
I just want to bring to your attention one single number –30.88 per cent. That’s how much the S&P/ASX 200 Index is up – including dividends – since the pre-Christmas low last year.
Last November and December do seem like a long time ago. Indeed, on December 31, this masthead reported: “Friday's close of 5654.32 though is 719 points or 11.2 per cent from the index's 2018 peak of 6373.50 reached in late August. The brunt of the losses, or near 9 per cent, have been during the final three months of 2018.”
What couldn’t have been known at that point is that, over the next 11 months, the ASX would gain the equivalent of three years’ worth of average returns.
And think back over 2019. We had ongoing US-China trade wars, a banking Royal Commission, the departure of two bank bosses and dividend (and franking) cuts. Retail sales were poor. Economic growth was tepid. Unemployment remained at the low end of the historic range, but underemployment remained. And house prices fell through the first half of the year.
Despite all those headwinds, the market still rose almost 31 per cent from its December malaise.
Now, let’s look forward, with a few suggestions.
First, if no-one predicted the big rise in the ASX this year, should you really pay attention to next year’s market forecasts?
Second, if the much-reported house price crash didn’t happen, should you really listen when the usual suspects repeat the dose, as they almost certainly will?
Shouldn’t we, instead, look to legendary investor Warren Buffett, who – over more than half a century – has shown that slow and steady wins the race?
In the short run, he reminds us that the market is a voting machine and, that in the long run, it’s a weighing machine. In other words, ignore the noise – and the short-term predictions.
Instead, just buy high-quality shares at a good price and let time do all the work.
Scott Phillips is the Motley Fool’s chief investment officer.
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