As we embark on 2024, please read and carefully consider something I read in the Wall Street Journal.
The regular Wall Street Journal survey finds economists think there is a 63% chance of recession in the next year. And a survey of economists and investors by the Federal Reserve Bank of Philadelphia shows expectations that gross domestic product will fall in three or four quarters are by far the highest since it started in 1968.
Economists and investors alike have also learned to appreciate a market indicator that has in the past preceded recession, the inverted yield curve, when long-dated bond yields are lower than those maturing soon. The 10-year Treasury yield is now 0.8 percentage point below the three-month yield, the biggest gap since December 2000 in what is, according to Campbell Harvey of Duke University, the most reliable indicator of recession.
We've heard similar comments this past December. There is one problem we have with the comments quoted above. They were written in the first week of December 2022, almost 13 months ago*. There has been no recession since then, the 10-year Treasury yield has now widened to 1.48 percentage points below the three-month yield, and several major market indices were up 20% or more in the past year.
The Wall Street Journal, the Federal Reserve Bank, and Duke University all employ many intelligent, well-reasoned professionals. If intelligence alone were sufficient for success in investing, then the most brilliant individuals would consistently outperform others every year. It seems like every few years there is a story of some fund blowing up that was successful in the past. Credit the Journal writers with the intellectual humility required when making market predictions and have since reported how they and others got this past year so wrong.
There is nothing wrong with predictions and we certainly need to plan, but we tend to forget the role that luck, randomness, and emotion play in future outcomes. The outcome in any year is the net result of millions of interactions, emotional collisions, and second and third-order consequences, all of which are impossible to accurately predict with any real reliability. The noted physicist Richard Feynman wrote “Imagine how much harder physics would be if electrons had feeling?”.
What happens in the new year will be one outcome, initially hidden within a range of possible outcomes. Some are good, some are not as favorable. Probable events often fail to materialize, while unlikely events occur with more frequency than we anticipate.
These are some things to keep in mind as we read the predictions for the new year. Please check out more of our thoughts and visit our YouTube channel.
*Streetwise, by James Mackintosh, Wall Street Journal, 12/4/2022; https://www.wsj.com/articles/economists-think-they-can-see-recession-comingfor-a-change-11670150634.