What you worry about about the stock market isn't something you'll wish you were worrying about a year from now. It is the unforeseen circumstances that hinder investors. Today's concerns are already priced in.
The occasion to mention this was the World Economic Forum (WEF) held in Davos, Switzerland, earlier this month. In conjunction with this year's event, WEF, as every year, produced a report on extreme global risks, based on interviews and surveys with hundreds of thought leaders from governments, international organizations, scientific experts, and media outlets. I have summarized.
The risks considered most urgent almost certainly reflect what has already happened. The best people in the world seem to be almost always fighting yesterday's battles.
Let's take a look at last year's report published in January 2023. The biggest risk in terms of impact and severity over the next two years was the “cost of living crisis.” It's easy to see why. It's inflation. For example, the U.S. CPI inflation rate rose 8.0% in the 12 months leading up to this report, the highest calendar-year rate in more than 40 years. This followed a 4.7% rise in US inflation over the previous 12 months, itself the highest annual rise in more than 30 years.
The world's thought leaders suddenly realized that the rise in inflation was not a fad, pushing the cost of living crisis to the top of their concerns for the future. It's even higher than war, famine, political polarization, or any of the myriad other potential risks that could lead to derailment. financial market.
Ironically, this concern about inflation came as inflation was nearing its worst point. It would have been far more useful for the world's thought leaders to raise the risk of inflation in a report a year or two ago. However, the inflation rate was not even in the top 10 in the January 2022 report.
I've taken advantage of the annual Davos conference to write about this “close the barn door after the horses are gone” trend. Other examples from past Davos meetings include:
- The 2021 Global Risks Report puts infectious diseases at number one in the global risk rankings after the coronavirus pandemic plunged the global economy into a state of investment equivalent to a medical coma. surfaced. 1 year ago was 10 yearsth place.
- A 2009 report ranked “asset price collapse” as the highest risk, as stock prices were already collapsing. Even though stock and bond markets are now more overvalued by objective standards than they were back then, “asset price collapse'' is not even in the top 10 this year.
I don't mean to criticize the WEF, but I just want to point out that even the rich and famous are subject to the same behavioral tendencies as everyone else. Psychologists call this universal tendency “recency bias.” In this tendency, we give more importance to the recent past than to what happened many years ago.
To overcome recency bias, we need to learn history better. By default, we should assume that what happened a century ago is just as likely to happen again as what happened last year. That won't always be the case, but it's a much better assumption than believing in Wall Street's four most dangerous words: “This time it's different.”
The challenge we all face is that the direction of the stock market this year will depend on whether conditions are better or worse than currently expected. By definition, that means we don't know. What we know is already built into the price.
This alone is already a major challenge, but there are many more. Because the market reacts almost immediately when something unexpected happens, you or I would be a day late and a dollar short on that reaction. Therefore, you need to plan your finances in advance. Otherwise, we will always be in reactive mode, buying high and selling low, and are guaranteed to lose.
As the late Stanford University psychologist Amos Tversky, who helped discover recency bias, once said: “It's scary to think that you might not know something, but it's even more scary to think that the world, by and large, is run by people who believe they know exactly what's going on. It’s terrifying.”
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. You can contact him at: mark@hulbertrateds.com
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