By J.P. Szafranski
BridgeTower Media Newswires
Forecasting is difficult. Great technological advances have improved areas like weather forecasting over the years, making us collectively safer in the process. But meteorologists would gladly tell you how hard it remains to project weather outcomes in the face of numerous uncertain atmospheric variables. Their model-driven forecasts are often ridiculed by us casual consumers for missing the mark.
Financial market forecasting like attempting to predict trends in interest rates and stock prices remains a fool’s errand and should remain so indefinitely. This doesn’t stop folks from trying. The ever-increasing abundance of available data almost begs to be churned through a statistical model with the aim of gleaning some useful edge about the future path of market prices. The problem is there are just too many variables to account for, many of which are dramatically affected by changing human sentiment, a notoriously volatile element.
The Federal Open Market Committee of the U.S. Federal Reserve Bank is poised to gather for a regular meeting. Its committee members have a rather ignominious track record when it comes to forecasting.
In 1996, then-Fed Chairman Alan Greenspan made an overt call on stock prices being overvalued with his famous “irrational exuberance” speech. While he had good reason for his point of view, his market timing was wildly off as the stock market continued to rally up through the turn of the century.
In May 2007, sitting Chair Ben Bernanke remarked, “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” It turns out that the nation’s worst financial crisis and economic recession in a generation driven by such spillovers was already unfolding as he spoke those words.
One might think that such poor forecasts would chasten current members of the FOMC. But one would be wrong. In April 2018, incoming President of the New York Fed John Williams offered the following while speaking in Madrid, as reported by Bloomberg, “My own forecast would be that interest rates are going to move up gradually, smoothly. It’s going to be like a 747 landing and people don’t even realize that they can turn their phones on.”
We observed at the time that his statement had a 99% chance of looking silly. We said his forecast had multiple ways of potentially going awry. First, interest rates might not go up at all. Second, interest rates might go up in ways that are neither gradual nor smooth.
As we sit today, barely more than a year hence, that forecast was in fact wrong in both possible ways. First, a stock market selloff was sparked in October at least in part because investors were spooked by a persistently rising 10-year U.S. Treasury benchmark yield, quickly up by half a percent from Williams’ remarks. Investors feared rates had reached a level that could restrain the economy and force asset prices lower.
Now, as market participants grapple with the prospects of an economic slowdown, the benchmark interest rate has collapsed to 2.1%, down from a high of 3.2% (and the 2.7% level when Williams used the soft, imperceptible aircraft landing metaphor).
FOMC members are typically highly qualified professionals with a very important job to do. But they are no more likely to accurately predict market outcomes than your next Uber driver. Acknowledging uncertainty in the future while carefully and patiently adjusting monetary policy seems like the right way to fly the plane.
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J.P. Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital.com).
