Using Economic Data to Predict the Market? It’s a Waste of Time

More than 40 years ago, if you had made a list of the most influential investors in America, Peter Lynch would have been near the top. From 1977 to 1990 he ran Fidelity’s Magellan Fund, and during this span compounded capital at a rate of more than 29%.1 He achieved this feat by managing to choose stocks for his fund that turned out to outpace the market as a whole.

Lynch had three things going for him. He ran the fund during an era characterized by tremendous growth (including two significant corrections). He knew that analyzing big economic trends would not enable him to predict what the market would do in the future. And he had the good sense to step down from his role as fund manager while he was still on top.

Lynch had a famous quote about that second item: “If you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”

You might think the opposite of Mr. Lynch’s quote would be true. After all, if you carefully study mountains of data in the leading economic indicators, and note how the market responds each time, when you see those same conditions recur, you can be pretty sure what the market will do. Right?

Unfortunately, this premise sounds so true. And that’s what lures so many investors into the belief that they will somehow “crack the code” and be successful at timing the market.

A stock analyst who writes about the market under the penname Courage & Conviction recently looked at how wrong the big name forecasters have been about the market over the past two years. In 2022 the median forecast for the S&P 500 was for a gain of 7.5%. It dropped by more than 19%. Stung by that (recency bias), for 2023 the forecasters predicted modest to no growth. The index gained more than 24%.

Our anonymous analyst writes, “If highly paid Wall Street economists can’t really, at least certainly not on a consistent basis, predict the broader stock market, then why do individual investors pretend that they can?”

Courage & Conviction adds that most of these experts have PhDs from leading schools, high IQs, and access to the best information available.

However, you don’t need a crystal ball to succeed in investing. Empirical evidence has shown that over longer time periods, the U.S. stock market has been an exceptional place to compound investors’ savings and outpace inflation.

Knowing this, the prudent investor will have a long-term view when saving for retirement. This means accepting short-term volatility as a normal aspect of participating in the market. And he or she will work with a trusted advisor who can create a plan for their specific timeline and financial situation, helping to keep them on track when short-term concerns arise.