2021: Predictions Shmedictions

Markets are impossible to predict, even in retrospect.  

If someone had told you of the horrific facts of 2020 - what sort of predictions would you make about equity prices?

Imagine your future self travels back in time to December 2019 to warn you.  Future You has come directly from a Dec 31st, 2020 Zoom New Year’s Eve Party (complete with stylish top and sweat pant bottoms) - and says to you in rushed, hushed tones:

• Excuse my outfit - this is the way we dress for parties in 2020.

• A deadly pandemic has killed 340,000 people in the United States.  It pervades every facet of society and your family members and close friends are at risk.   The last 30 days of the year have been horrible.  Every day brings a tragedy in lives lost that rivals or surpasses Sept 11th, 2001.

• It’s devastated entire industries.  ~10 million have lost their jobs

• Cities and towns have shut down for weeks at a time

• The price of a barrel of oil dropped below zero for almost an entire week 

Would you have predicted that US equities (measured by the S&P 500*) would end the year up +18%?

Or would you have said markets would likely be down ~30%?  More?

And how many of you would have said the right answer, which was both - that, on March 23rd, 2020, the market was down ~30% YTD, and on Dec 31st 2020, the market closed up ~18% - ie, that the market would rally 70% in the span of 9 months to close at an all time high?

I ask these questions for the simple reason that it lays bare the arrogance of prediction.  

You might point out that I left out key variables - like the discovery of highly effective vaccines, or the change in the 10 year US Treasury yield, or the actions of the Fed, or the amount of fiscal stimulus.  Those are all fair points.

But the consequential event here was the emergence of a deadly pandemic.   None of the large Wall Street firms called for 2020 to be the “year of the pandemic”.  All of them missed the most consequential event of the year.  

You might say that’s unfair, it’s not possible to predict something like Covid before it happens!  And that, ladies and gentlemen, is the whole point.

Many consequential events are unpredictable.  Those who are in the business of predicting are nothing more than sooth-sayers, witch doctors, astrologists - though they may be highly compensated, and look good in a suit and tie, and weave together impressive narratives.

Pandemics, when they do happen, are not Black Swans - no more than a cyclical recession is.  Pandemics are an important part of the tapestry of our history - just like wars, bull markets, market crashes, bubbles, hyper-inflation, recessions and depressions are.  These things all happen, some with a disturbing regularity.  Just look at recent market crashes:

• 1987 black monday

• 1998 LTCM

• 1999-2000 dot com bust

• 2008 financial crisis

• 2011 US debt downgrade and European PIGS crisis

• 2020 Covid-19

As a family, how does one prepare for these types of unpredictable scenarios?

Our aim at Ahara Advisors  is to help you prepare for all types of weather: from the bright sunny days to the ferocious tsunamis.  

There’s one very effective technique that works for many of the scenarios above:  always have a cash reserve.  If you have a suitable cash reserve (that allows you to weather 2 quarters to 2 years worth of expenses), and you are one of the 10 million people to lose your job - you don’t have to sell your financial assets when they are down ~30% in March.  You can hold out for the rebound.  

If you were more fortunate and had job security in 2020 plus a cash reserve - you could have bought shares of great companies at better prices.  If you did that, you likely would have made enormous profits

If you did not have a cash reserve you would be vulnerable to losing your job and having to liquidate a portion of your portfolio at a time prices had dropped significantly.  Or worst case, if you were levered with what is known as “mark to market leverage” - you could have been forced by your broker to liquidate positions at fire sale prices.   You would have crystalized large losses in your wealth.

So if you ask me what my outlook is for 2021 - I’ll give you my honest answer.  

I don’t have one.  

* Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred.  Returns do include reinvested dividends. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value.