“Doubt is not a pleasant condition, but certainty is an absurd one.”
After the year just finished it would be easy to believe that the quote above originated from a political pundit speaking about our presidential election. After both the Brexit and the U.S. elections, it would not be surprising if it had been uttered by one of the pollsters in the U.K. or here in the U.S.
But no, the quote, over 200 years old, was spoken by the French commentator, author, and playwright, who went by the single moniker of Voltaire (and you thought Madonna, or earlier still, Elvis started that one-word naming convention!). Voltaire proved a survivor throughout years of censorship and religious persecution in pre-revolutionary France. He was exiled from the country, and, even after returning, was banned from Paris for 25 years. Still, somehow he proved quite outspoken even in a time of significant uncertainty. Despite the environment, or perhaps because of it, his words regarding the absurdity of certainty still resonate.
I know they came back to me throughout 2016, and even today as we embark on a new administration in Washington. It is easy to say that the pundits were so certain and so wrong in 2016 with Brexit and the U.S. elections. But it wasn’t just the pundits; it was difficult to find anyone on the other side, except a few true believers who were generally ridiculed in both countries.
When it came to the financial experts, their results were not much different from their political brethren. If Brexit passed, we were warned, stocks would plunge. They rallied.
If Brexit passed, the U.K. economy would be severely impacted. Instead, Britain’s was the top economy of the developed countries in the fourth quarter.
If Trump won, it was widely reported by the experts that the stock market would crash. They were right, for about three hours overnight. Then a rally ensued that has lasted more than eight weeks and saw the three stock market indexes hit new all-time highs last week.
Of course, we don’t have to look to commentators from hundreds of years ago or to the recent examples to confirm the truth of Voltaire’s words. The late Michael Crichton, echoing Voltaire, wrote, “I am certain there is too much certainty in the world.”
As you scan the various internet services, don’t you get the same feeling? When you listen to the media, whether mainstream or not, they both opine with a sense of certainty that they are right—that they know the future. One side knows that the Trump administration is going to be good for the economy, while the other is certain that a crash is imminent.
Usually on such debates, if you know the political leanings of the commentator, you can pretty easily discard such opinions as not likely predictive of anything. Republicans can find nothing good about President Obama’s tenure, and Democrats seem to be declaring President-elect Trump a failure even before he takes office—and they’re both certain of their opinions.
After watching this certainty for many, many political cycles, I’ve learned that the truth is probably somewhere in between. The markets and the economy will ride high and they will fall, and the prognostications of experts are not likely to get it right except in hindsight.
You might think such a comment to be strange coming from a market watcher who dynamically manages billions of dollars of investor capital. Yet, I have not seen much evidence to contradict this observation.
Last week I saw a report on all of the Wall Street brokers’ projections for the stock market’s direction in the year ahead. Many may take solace from the fact that all of the firm targets pointed higher and that the average firm forecast of 4.4% was for a positive return for 2017 for stocks.
However, some might not know that it was the lowest return projected since 2005. Furthermore, some may not have realized that for 17 years the brokerage industry has always projected a gain (maybe there is a case that can be made for certainty in this one instance—the brokerage firms as a group will always be overly optimistic).
Of course, stocks did not always rise each year in that period. And the average yearly forecast was, on average, 5.4 percentile points too high when compared to the returns actually achieved.
Certainty may exist with respect to observable objects in the here and now (although, there is plenty of evidence of the unreliability of eyewitnesses in the annals of the law). But when it comes to forecasting, all of the research shows that it is not reliable at all.
For that reason, more than 40 years ago, I stopped trying to forecast markets and chose instead to listen to them. When prices or fundamentals, monetary or economic, change direction, we follow, we don’t predict. It is the essence of our quantitative approach.
In 2016, it meant that we were still fully invested in most of our stock market strategies when Brexit occurred. We were still there when the Trump surprise occurred. And, yes, we remain in a holding pattern today as one administration prepares to exit the stage and another comes into power.
While our approach has nothing to do with forecasting, and certainly does not reflect any political point of view, unfortunately, it appears that most investors still pay attention to such things and let them influence their investment decisions. Surveys consistently show investors today to be invested predominantly in fixed-income securities and funds.
Most investors have not returned to the percentage of equities held before the 2007–2008 crash. Yet stocks have more than doubled since that time, and new all-time highs have been recorded rather routinely for many years. Despite that success, the investor behavior is understandable.
The media hype has soared to unparalleled levels. The certainty of the opposing voices has become more extreme. The losses in both the 2000–2003 and 2007–2008 market declines were real and painful.
Investing in such a climate can be frightening, and confusing. “Doubt can be unpleasant…” and that causes avoidance. The lack of certainty is the certainty.
In such an investment world, we have found that the use of disciplined, computer-driven strategies can act in the face of uncertainties because they are based instead on probabilities. Although the probabilities never hit 100%, they can achieve reasonable returns, and they have built-in tools designed to manage and control risk to acceptable levels.
Best of all, they can remove emotions from investing and allow people to invest without having to achieve a level of certainty that many may never be able to attain.
Last week the markets rallied once again. This vindicated our intermediate-term market indicators that have been confirming a market rally for most of the last 12 months. They all remain bullish.
Soaring interest rates that have been a negative driver of bond returns since last June actually have been reversing for the last few weeks, and historically that has been positive for stocks as well.
Political and seasonal forces remain encouraging, and earnings, which registered the first up quarter since 2015 last quarter, will be reported on starting next week.
A short-term downturn that should be recognized as a buying opportunity has been registering in our mean-reversion indicators that focus on near-term days rather than the months targeted by our intermediate indicators.
While the new market highs mean that investors who are in the market have achieved success, I know for some that also means it is hard to invest at what may be a top. The fear of being the last one in overcomes the probabilities for success.
That’s why dynamic, risk-managed strategies can help. They are designed to use time-proven indicators to monitor and manage the risk for you, allowing you to get into the markets and stay there throughout the rallies that let your portfolios grow in value.
Such strategies remove the emotions, and emotions are what lead to both the overconfidence that a sense of certainty can bring and the doubt accompanying uncertainty.
All the best,
P.S. Many have asked about implant-dentistry pioneer, Dr. Carl Misch, DDS, since I wrote this article back in 2015 about the fight being waged by my childhood (since fifth grade) friend who was projected to have just weeks to live back then. Unfortunately, I learned last week that he lost his two-year battle with brain cancer. Knowing Carl so well and so long, I knew if anyone could extend the fight successfully, it was him. But even the strong, the smart, the incredibly able, who give back so much to this world have to at last succumb to the only certainty. Those of us who knew him will miss his grin, his skill, his sense of humor, and his devotion to his clients and friends. Rest in peace, old friend.