Market Forecasts

Correctly timing the market, which requires predicting the future, is difficult at best and realistically is an impossible task to do consistently. So while we hear market forecasts and predictions on a daily basis from market pundits, is it important to keep in mind that no matter how much of an expert this person is or how much experience they have, they are still attempting to predict the future. When considering the fixed income portion of your portfolio that is earmarked for capital preservation, relying on market forecasts can be a recipe for disaster if you are constantly trying to time the market. Actively trading based on predictions and projections with your capital preservation allocation could very well lead to missed opportunities and lost principal. The below charts highlight a few examples of how difficult it is to correctly predict the future.

The first graph shows the consensus estimate for the 10-year Treasury at the start of each year for the next five quarters (red line), based on the Philadelphia Fed’s Survey of Professional Forecasters. The blue line shows what actually happened. Even for some of the brightest economic minds, a task as “simple” as consistently predicting what a single interest rate would do over a 15 month span has proved near impossible.

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This next graph shows what the Fed Funds rate was expected to do as of January 1, 2022 according to Bloomberg calculations based on where Fed Funds futures were trading. So, this “forecast” is not based simply on what market pundits are saying, it is based on where securities were actually trading. The accuracy of these predictions is apparent… as of last week, the forecast had missed the mark by over 300 basis points.