The rare person who in October 2022 correctly predicted that...

The rare person who in October 2022 correctly predicted that the Fed wouldn’t cut interest rates over the next 20 months was absolutely right . . . and if that prediction kept them out of the market, they’ve missed out on a gain of roughly 50% in the Standard & Poor’s 500 index. The rate-cut optimist, on the other hand, was absolutely wrong about rates but is likely much richer today. So, yes, market behavior is very tough to gauge correctly. But I’m not going to take time here to catalog the errors of market savants.

Instead, I’d like to focus on why so many market forecasts fail. The performance of economies and companies might tend toward predictability given that the forces governing them are somewhat . . . shall I say . . . mechanical. In these areas, one might say “if A, then B” with some degree of confidence. Predictions here might, therefore, have some chance of being correct, albeit that’s mostly the case when trends continue unabated and extrapolation works.

But markets swing more than economies and companies. Why? Because of the importance and unpredictability of market participants’ psyches or emotions.

This piece is a great overview of how forecasters are falsely confident.

And how, in finance, forecasters either try to focus on fundamentals (and are wrong because financial markets are based on sentiment - divorced from fundamentals) or focus on sentiment (and are wrong because sentiment is capricious).

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www.joshbeckman.org/notes/747640093