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  • Writer's pictureRob Edwards

The Folly of Predictions



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Coming into 2023, Wall Street strategists’ consensus forecast for the markets was that we were headed for a recession.


In response, investors sought safety in Treasury Bills and other defensive-oriented securities. As the Federal Reserve slowly got control of inflation and interest rates stabilized, it became clear that the worst may have been behind us. From this time, the Magnificent Seven—a small group of high-quality growth stocks—emerged and helped lead American stocks to new all-time highs. If you followed the consensus, you likely missed it. Yet, many still look to the same strategists for predictions as to what may happen next.


Sometimes it is easier to accept the illusion of predictions rather than the reality of uncertainty.


As humans, we have an innate desire to make order out of chaos. We think the markets can be measured with precision, like an engineering or physics problem. But investing, although measured by numbers, is not Newtonian physics.


And it can be tempting to internalize predictions about the future, especially when the stakes are high. We have no problem ignoring a weatherman who forecasts cloudy skies or the Las Vegas odds maker who predicts the line on a football game; except for NASA missions or high-rolling gamblers, the stakes in those predictions are relatively low.


But when it comes to the outcome of our investment portfolios, we tend to give more attention to expert predictions because the stakes are relatively high.


As we approach the presidential election in November, a natural question will surface: What will happen to the market if so-and-so candidate prevails? Depending on who you are and what you believe, the answer to this question can range anywhere from euphoric to cataclysmic, with potentially far-ranging impacts on portfolios. I’ve seen the consequences of flawed predictions driving bad money decisions firsthand. I can also understand how scary it can be to accept how much of the world we don’t understand and how much of what happens to us – and to our portfolios – is out of our control.


Nobody knows the future, and we can fool ourselves into thinking that someone knows anything about what is about to happen next, particularly in complex systems. Predictions are, by their very nature, just that. Sometimes they are right and sometimes they are wrong.


And while predictions can be fascinating, terrifying, and even entertaining, just don’t let them overly influence the decisions you make with respect to your portfolio.


 

Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact with respect to any company, industry, or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.

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