By Steve Tepper, CFP®, MBA
Election season is also pundit season—when every self-proclaimed expert who maybe made one correct market call years ago emerges from their lair under the steps. You’ll find them making the rounds on the financial news shows to cast predictions on how capital markets will respond depending on who wins the upcoming election. Based on track record, you might be better off getting your weather predictions from Punxsutawney Phil.
It isn’t just elections the pundits get wrong. It’s pretty much everything—predictions that seem laughable in historical context. Here are a few of my favorites culled from the highly reliable internet:
The Strong 2005 Real Estate Market: Ben Bernanke is a modern rock star economist, former head of the Federal Reserve, and advisor to George W. Bush. In July 2005, he rejected the idea that the housing boom was a dangerous bubble, saying, like pretty much every real estate agent, that housing prices never fall (at least not nationally), and seeing no possibility of a collapse rippling through the credit and job markets.
The Post-WWII Great Depression: Few economists amassed the resume of Paul Samuelson: Harvard PhD, MIT professor, Nobel Prize winner, best-selling author, advisor to multiple presidents. Yet he came up with a beauty of a prediction in 1945 after the war ended, when he advised President Truman that grinding the government’s enormous war machine spending to a halt would bring a return of the Great Depression, or worse.
Truman ignored that warning and cut spending by a massive 61%. The recession that followed lasted just eight months, and even with millions of GIs returning home and looking for work, the unemployment rate topped out at 5.2%. By 1947, economic prosperity returned to pre-Depression levels.
The End of Market Crashes: Arguably, no economist had as great an impact on government macroeconomic policy than John Maynard Keynes. His 1936 book The General Theory posited that during a recession or depression, government can stimulate consumer demand through deficit spending, a theory that has been put to practice many times since, including right now as Congress negotiates a massive spending bill.
Yet the man who invented one of the most-used recession remedies failed just a few years earlier to see one coming. In 1927, Keynes believed economic crashes were a thing of the past, stating: “We will not have any more crashes in our time.”
Bernanke, Samuelson, and Keynes are hardly under-the-steps-dwelling crackpots with one lucky prediction to their credit, parlaying that one-time luck into unending TV appearances. In fact, after their horrible predictions, they went on to their greatest acclaim. Bernanke, for example, was Time magazine’s 2009 Man of the Year. This highlights the problem with listening to anyone’s predictions on the economy and the markets, let alone taking action on your investments based on their predictions.
We have seen that the downside of taking action and making a big mistake can be far greater than the downside of taking no action, getting caught fully invested during a tumbling market, but patiently riding it out. In the absence of a truly reliable voice to guide us in that decision, the choice is obvious.
Source: Worst Economic Predictions by Devin Roundtree, American Institute for Economic Research, July 15, 2014.