Question: I heard an economist say that 2014 would be a year of very slow growth? If that’s true, what does it say about the stock market?
Answer: Stop trying to aim at a target you can’t see. Doing so usually results in harm to yourself or others.
News flash: the future is really, really difficult to predict. For every economist pessimistic about 2014, I can find you an optimist. But to be honest with you, I’d have no idea which one was going to be right about 2014. Or 2015.
In April 2000, the International Monetary Fund released a statement affirming that “the picture for global growth is a strong and quite positive one for the year 2000 and we believe beyond.”
That same month the NASDAQ lost 25% of its value in one week and the Dow fell 600 points in one day. April 2000 was the beginning of the worst bear market since 1973. The stock market lost half its value from the March 2000 peak to the bottom in the summer of 2002. Those were ugly, shocking and unnerving days, as few people alive had ever experienced that kind of broad, brutal and protracted market sell off.
Remember the housing bubble caused by (among other things) the proliferation of sub-prime mortgages? Here’s what then Fed Chairman Ben Bernanke said about the possibility of a housing bubble, “We’ve never had a decline in house prices on a nationwide basis.”
This is a good time to recall John Kenneth Galbraith’s quip, “The only function of economic forecasting is to make astrology look respectable.”
So if we can’t confidently rely on the economic forecasts of economists, what do we do? Let me suggest a framework for how to view your economic future.
We don’t see most of our big problems coming. That’s because they don’t look like our old big problems. The brightest minds in the world didn’t realize the sub-prime mortgage problem would metastasize and nearly destroy our financial system.
We don’t see most of our opportunities coming. The same year the nation began its second economic swoon of the decade (2008), energy companies were snapping up mineral leases in northwest Louisiana and multiple locations around the country. Employing new drilling and extracting techniques, these companies would find enormous reservoirs of natural gas in shale formations 12,000 feet underground. Suddenly America was moving toward energy independence again.
So far, our surprise innovations have overcome our unforeseen problems. This is the essence of capitalism in a free society characterized by the rule of law. This is not to say we shouldn’t prepare for problems or attempt to reduce the risks we can see. We should. But if you tie most of your hope for an economically prosperous future on the smartest people in the room coming up with all kinds of plans to keep you out of trouble, you’re going to be constantly frustrated and very probably poor.
If I have to cast my economic lot (as we all must), I’m casting mine with the innovators, the creators and the entrepreneurs who have risked it all because they saw something that I and a thousand bright economists didn’t have eyes to see.
The best way to prepare for economic problems is by having a sane financial plan: controlled spending, consistent saving, reduced or eliminated debt, full-replacement insurance, adequate liquidity and a diversified investment portfolio, to hit some of the highlights.
Yes, prepare for problems, but don’t frustrate yourself by trying to predict them.
And while you’re at it, don’t try to predict the future either.
Just embrace it.