A Forecast for Volatility
Those who regularly make forecasts of the economy, stock market and interest rates are typically wrong. Independent researchers have found that the experts make correct forecasts 47% of the time. This makes them slightly less effective than a coin flip, or the proverbial blind chimpanzee throwing darts at the stock tables. With a system as complicated as the economy or the stock market, it is virtually impossible to consider all the various drivers of change. Thus, it is virtually impossible to make informed, correct forecasts on a consistent basis. With that as a preamble, I’d like to issue my forecast for the future of the capital markets.
Be forewarned: my forecasts are as useless as anyone else’s. However, I’d like to go through this exercise for two reasons. First, I’m constantly asked what I think of the markets, and so, here are my thoughts. More
With that as a preamble, I’d like to issue my forecast for the future of the capital markets. Be forewarned: my forecasts are as useless as anyone else’s. However, I’d like to go through this exercise for two reasons. First, I’m constantly asked what I think of the markets, and so, here are my thoughts. More importantly though, I’d like to issue a forecast as a notice that the environment will likely change in the near future. For the past six years, we have enjoyed a very stable, significant run in the stock market. At the same time, bonds have also performed quite well as interest rates have fallen to record lows. There has been nary a flutter from these trends since March 2009. I believe that is starting to change. Forecast number one: the stock market will continue
For the past six years, we have enjoyed a very stable, significant run in the stock market. At the same time, bonds have also performed quite well as interest rates have fallen to record lows. There has been nary a flutter from these trends since March 2009. I believe that is starting to change. Forecast number one: the stock market will continue
Forecast number one: the stock market will continue its upward trend for at least two to three more years. I don’t think we’ll see the kinds of year-over-year gains we’ve experienced the past several years, but I believe the stock market will continue to rise in value. There are certainly pros and cons in the economy, but overall, the balance seems to be positive enough for stocks to sustain their rally. Forecast number two: interest rates will rise, starting this year. The Fed has made it pretty clear that it will start increasing short-term rates soon. Back when Alan Greenspan was the Fed chief, you had to read the tea leaves to figure out what he was going to do. However, under Ben Bernanke and Janet Yellen, the Fed has been more transparent. I’m inclined to take them at their word that rates will rise. The Fed only sets short-term interest rates, so there are some saying that longer-term rates will remain low. This is certainly possible, but since 1975 short-term Fed Funds rates and the yield on the ten-year Treasury note have had a correlation of 92%. It may take a few months for
Forecast number two: interest rates will rise, starting this year. The Fed has made it pretty clear that it will start increasing short-term rates soon. Back when Alan Greenspan was the Fed chief, you had to read the tea leaves to figure out what he was going to do. However, under Ben Bernanke and Janet Yellen, the Fed has been more transparent. I’m inclined to take them at their word that rates will rise. The Fed only sets short-term interest rates, so there are some saying that longer-term rates will remain low. This is certainly possible, but since 1975 short-term Fed Funds rates and the yield on the ten-year Treasury note have had a correlation of 92%. It may take a few months for
The Fed only sets short-term interest rates, so there are some saying that longer-term rates will remain low. This is certainly possible, but since 1975 short-term Fed Funds rates and the yield on the ten-year Treasury note have had a correlation of 92%. It may take a few months for longer-term bonds to react, but I believe that by year-end, we’ll see higher interest rates across the yield curve.
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