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The Consequences of Listening to Armageddonists

James Behr Jr

James Behr Jr

Vice President

November 26, 2019

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The Consequences of Listening to Armageddonists

When an acclaimed market-watcher, money manager, economist or “stock market expert” sounds the alarm that a recession is imminent, how do you respond?

This may be a surprise but the opportunity cost of selling equities for perceived fixed income “safe havens” has not been a successful strategy during the past decade. J.P. Morgan studied a few recent notable calls for “Armageddon” within equity markets. The results in the chart below speak for themselves.

From J.P. Morgan’s Michael Cembalest. “This chart is about the opportunity loss for investors that acted upon seeing their comments at the time. One example: $1 shifted from equities to bonds in 2014 in response to mega-bearish commentary would have underperformed equities by around 40% as the S&P 500, propelled more by earnings growth than by multiple expansion, rolled on.” You can read the full piece here.

Had you sold all investments in the S&P 500 on May 20, 2010, when the first expert forecasted things getting worse for the economy, you would have underperformed by over 60%! This would be if you had allocated your funds to a mixture of government, mortgage-backed and corporate bonds.

Most of these “Armageddonists” are considered experts in the financial world and most have had successful careers. Yet it is important to remember that fear and negativity engage audiences stronger than positivity, especially within financial markets. There is always the risk of short-term market sell-offs and a 5-10% pullback from recent high points in markets is quite common. The risks of trying to predict these market corrections may be greater, as seen in the graph above. What is important is to remember the long-term investment goals and investment plan that you have created.

We always encourage our clients to tune out the noise from negative headlines and focus on their long-term investment plans. It can be difficult when market experts make these proclamations yet investing in U.S. equities has historically rewarded investors over the long haul. We have written previously about our views on sensational media headlines and staying invested for the long term here and here

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The Consequences of Listening to Armageddonists

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