Occasionally, the investment industry spins stories and promotes gobbledygook with the objective of distracting, confusing, or just doing whatever they can to get the poor investor to follow a certain course of action benefiting the industry itself. This is unfortunate because it erodes confidence, trust, and the investor realizing a successful life-long financial journey. Today, we face an unusually pernicious example of gobbledygook, i.e., the suggestion that because the U.S. economy will grow, prosper, and strengthen over the year ahead, so will the stock market.
For a mind with too many soundtracks playing simultaneously . . . this example couldn't help but make me think of Sheryl Crow’s 1998 recording of "My Favorite Mistake" (written by Crow and Jeff Trott)
"You're my favorite mistake
Your friends are sorry for me
They watch you pretend to adore me
But I'm no fool to this game"
Let me backup and try to explain.
Let’s stay tightly focused on just the U.S. economy. We know an awful lot about how our economy’s doing . . . and what’s going on. We understand its strengths, weaknesses, imbalances, and prospective path over the year ahead. This is simple straightforward macroeconomic science. No, we don’t know exactly what will happen. But we are able to draw well-reasoned, solid, and high-confidence understandings that the U.S. economy is on a favorable trajectory. It will grow, strengthen, heal, and prosper. Labor will gain a larger share of an ever-expanding economic pie. Productivity will grow rapidly, inflation will come down, and the existing income/wealth disparity will shrink. Vast new industries are being given birth that will result in long-term accelerating growth for the U.S. economy, vast new job creation, and supportive tax revenue for vital municipal infrastructure. All of this is intensely positive. And I’m quite thankful.
So, what’s the problem?
The problem is the investment industry fabricates a false narrative and uses it to promote self-serving sales. The fake news is that a stronger economy results in higher stock market returns (and vice versa). This is particularly tragic because the investment industry knows all too well that this narrative is false and misleading. That it lacks the slightest shred, the most di minimums aspect, of supporting evidence. Really? Here’s the data . . .
The horizontal axis shows how fast the U.S. economy grew. The vertical axis shows what the stock market returned. As this graph demonstrates, there is virtually zero relationship between the growth rate of our economy and what the stock market returns. In other words, it’s purely random.
But Rob . . . you need to give it a longer period
The immediate and natural (and fair) pushback is that if given a longer time period, such as ten years, the positive relationship between U.S. economic growth and the returns of the stock market will come clear. Utter nonsense. No, it does not! Really? Here’s the data . . .
As this graph demonstrates, even if we restrict our view to 10-year time periods (and nothing shorter), the relationship between the growth rate of the U.S. economy and the return on the U.S. stock market is not too far from zero.
Why am I bringing this up?
The investment industry knows and has always known, that it’s engaged in misleading and hurtful gobbledygook here. So why am I bringing this topic up? Because forewarned is forearmed. Your objective is to achieve a successful, rewarding, fruitful life-long financial journey. One that is experienced with absolute confidence and unqualified comfort. This remains eminently doable. It really does. But it’s undermined by false prophets who shamelessly pretend they can predict the future turning points for the stock and/or bond markets based on their crystal ball forecasts for the U.S. economy. Such approaches are in direct contradiction of any and all past data. And such approaches meaningfully undermine and diminish your prospects for achieving a life-long fruitful financial reality. Run from such carnival barkers.
Investment professionals understand this issue well . . . and recognize that in today’s market, planning, structure, patience, engagement, and humility are the critical building blocks of a successful journey. Or to put it differently, behavioral bias must be securely locked inside the cage, and serious/genuine experience and training must be brought to bear.
Your financial advisor has a menu of possible investment solutions that are directly relevant to this peril. But the solution that is most appropriate to your unique needs and circumstances can only grow out of a meaningful discussion with your advisor. Reach out to them, talk with your advisor.
All data and statistics were provided by Global Financial Data (unless otherwise noted). Based on data from 12/31/1839 through the present. All stock market returns are represented by the S&P 500 Total Return Index. All stock market and economic growth data are inflation adjusted by the CPI.
It is not possible to invest, directly, in an index.
It is not possible to invest, directly, in any index referred to in this document.
Past performance is not an indicator of future results.
Fees, internal embedded expense ratios, and sales charges have not been subtracted from any of the performance results appearing in this document.
The information in this document is for the purpose of information exchange.
This is not a solicitation or offer to buy or sell any security.
You must do your own due diligence and consult a professional investment advisor before making any investment decisions.
The use of a proprietary technique, model, or algorithm does not guarantee any specific or profitable results.
The risk of loss in trading securities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. No strategy, including asset allocation and diversification, can assure success or protect against loss. Stock investing involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. International debt securities involve special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. International debt securities involve special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
All information contained in this document is believed to come from reliable sources. We do not warrant the accuracy or completeness of information made available and therefore will not be liable for any losses incurred.
No representation or warranty is made as to the reasonableness of the assumptions made herein.
Investment advice offered through Integrated Wealth Concepts LLC (a Registered Investment Adviser), d/b/a Integrated Financial Partners, Inc.
Rob Brown is solely an investment advisor representative of Integrated Financial Partners, and not affiliated with Donavan Financial or LPL Financial.