Who Can Investors Listen to When Everybody’s Wrong?: Barry Ritholtz

The year 2020 will be remembered for any number of things, including how wrong so many were about so much. From the pandemic to the election, and from the economy to financial markets, prognosticators did a horrible job.

When it comes to Wall Street, it’s easy to see why so few got it right. Coming into the year, not a single strategist had “global pandemic, 1.5 million deaths worldwide, the worst economic downturn since the Great Recession, a 34% market crash and subsequent rebound led by a handful of tech stocks” in their 2020 outlooks. But “tail risk” events, whether they be wars, natural disasters or pandemics, regularly upend the even the most logical of forecasters.

There are lessons in the deductive reasoning errors and faulty data analyses, no matter what the field, that can lead even the savviest market participants astray. Let’s consider three examples from the U.S. Presidential election and what they mean for investors.

Beware Coincidence: Money-making “insights” materialize regularly in the firehose of daily market data. Upon closer analysis, most turn out to be a mirage. Determining if these indicators are based on good logic can help an investor avoid losses.

Consider this fact: Since 1928, whenever the S&P 500 Index has risen in the three months prior to a presidential election, the party that controlled the White House won 90% of the time. Julian Emanuel, the chief equity and derivative strategist for BTIG LLC, seized upon this idea in mid-October, saying this and other market data suggest polls may be “underestimating the probability of President Trump getting re-elected.” And he wasn’t the only one to spotlight this datapoint.

In the three months prior to this year’s election, the S&P 500 rose 2.3%. Annualized, that is a gain of more than 9%, which is about average for any given year. Even so, the incumbent lost.