This article first appeared in the Globe and mail
on January 16, 2025. It is republished with permission.
It is said that if you hear something thirty times, you think it is true. I traced the root of this idea to a scientific theory called the Illusory Truth Effect, which refers to the human tendency to believe false information if it is repeated often enough.
This is an important concept in our fast-paced media world, where we are increasingly inundated with fake everything. False stories and images get in the way of the truth, help maintain the status quo, entrench the elite and, in the case of investing, lead to suboptimal decisions.
Here are some things you may have heard thirty or three thousand times that may not be quite right.
It’s the economy, stupid
Speaking of elite: economists are royalty on Bay and Wall Streets. The assumption is that where the economy goes, the stock market will follow.
Unfortunately, it’s more complicated than that. The relationship is weak at best because the stock market looks further ahead than the next three to six months and is influenced by events and trends not included in economic models.
Certainly, economic activity affects corporate profits, which in turn fuel stock prices, but short-term market movements are driven more by changes in valuation – how much investors are willing to pay for those profits – than by the variability of profits.
Interest rates are going down
Like older generations who remember buying a Canada Savings Bond with a 20 percent coupon, borrowers today still remember how low their mortgage rates were three years ago. Since interest rates rose in 2022, the recurring question in conversations and commentary has been: when will interest rates come back down? It seems like it’s only a matter of time before we return to 2021 levels, they say. But history shows otherwise.
The current interest rate level is fairly normal, perhaps even lower than normal. The laws of economics suggest that lenders should expect to have more purchasing power when the loan is repaid. In other words, they will have more than kept up with inflation. Today, when a bank makes a loan, or you borrow money through a bond or GIC purchase, the return is generally above the expected inflation rate (although not by much). This is normal.
Interest rates may fall due to a recession or political opportunism, but this should not be an assumption in your financial plan.
The economy is holding up
I hear it regularly. The US economy is doing astonishingly well despite all the disruption and uncertainty. Maybe, but it’s useful to compare the economy to a neighbor who seems to be doing well. They just installed a new kitchen, have a luxury SUV in the driveway and are enjoying beach vacations in the winter and European adventures in the summer. What you don’t know is how they do it and what their balance sheet looks like.
The US government lives just like that neighboring country, but in this case we know exactly how it does it. The numbers are visible to everyone. The federal government spends 33 percent more than it takes in, which amounts to 5 to 6 percent of the total economy.
The next time you hear about how wonderful the American economy is, remember that you are hearing about sales, not profits. Washington is expanding its credit cards and lines of credit, and certainly not maxing out its TFSAs and RRSPs.
2026 – another good year
We are approaching the end of the 2026 forecast season. You may have noticed that almost every investment professional feels compelled to make a statement about the coming year. After hearing thirty predictions, almost all of which predict a positive year, you begin to believe that there are people who know what will happen.
Unfortunately, the 30 times rule fails miserably in this regard. The short-term stock market forecasts are not worth the paper they are written on. An overwhelming majority of them expect a return of seven to ten percent, which seems reasonable given that the long-term average is at the high end of that range, but a more detailed analysis shows otherwise.
Since 1960, returns have been within the 7 to 10 percent range only twice in a calendar year (taken from our Volatility Meter – 50 percent Canadian stocks/50 percent global). Two out of 65. Meanwhile, the annual return increased twenty times by more than 20 percent and was negative fourteen times.
The investment industry is delusional about market forecasts, just as it is about the importance of recent economic data. Don’t go down the same rabbit hole. If you want fiction, read a good book.
#consensus #market #predictions