Howard Marks’ classic investing book The Most Important Thing has more nuggets of wisdom than I can count, but my personal favorites are his reflections on the futility of forecasting.
Marks, the Oaktree Capital Management co-founder, observes that macro forecasts on average are even less valuable than they are correct because they’re often the most wrong when the stakes are highest — at turning points. Some economists and strategists get it right some of the time, and they’re often lionized for it with investment industry awards and magazine profiles. But very few (at least among the folks that Marks and I know) get it right consistently. Here’s how Marks puts it in the 2011 book:
Ask yourself how many forecasters correctly predicted the subprime problem, global credit crisis and massive meltdown of 2007-2008. You might be able to think of a few, and you might conclude that their forecasts were valuable. But then ask yourself how many of those few went on to correctly foresee the economic recovery that started slowly in 2009 and the massive market rebound that year. I think the answer’s “very few.”
And that’s not an accident. Those who got 2007-2008 right probably did so at least in part because of a tendency toward negative views. As such, they probably stayed negative for 2009. The overall usefulness of those forecasts wasn’t great ... even though they were partially right about some of the most momentous financial events in the last eighty years.
That brings us to this week’s mea culpa from Morgan Stanley’s Michael Wilson, the reigning No. 1 portfolio strategist in Institutional Investor’s annual survey. Wilson, who nailed last year’s interest-rate-driven selloff in US equities, held on to his bearish views through 2023, advancing the thesis that the bear market would move into a second phase driven by sharp earnings declines. Of course, the S&P 500 did go into an “earnings recession,” but it’s been so shallow that many casual investors didn’t even notice it. Meanwhile, price-earnings multiples reinflated, fueling a nearly 20% total return on the US benchmark this year, catching Wilson and most of his strategist peers flat-footed.
On Monday, Wilson and his team outlined the reasons that their bearish views have been “wrong” this year, namely:
- US growth that exceeded expectations (albeit because of factors that Wilson’s team thinks may fade in the second half).
- The expansion of the Federal Reserve’s balance sheet in response to the March banking crisis.
- The excitement about artificial intelligence, has fueled gains for index behemoths Nvidia Corp. and Microsoft Corp. and led some investors to dream about broad productivity gains down the road.
- The aforementioned P/E multiple expansion is on the back of cooling inflation (although Morgan Stanley says disinflation is now a risk for revenue and earnings).
