How wise is it to play the prediction game? The year 2019 served up many examples of the unpredictability of markets.
Interest rates that US policy makers expected to rise fell instead. American consumers’ confidence weakened as the year began,(1) and news headlines broadcast fears of an economic slowdown. But investors who moved onto the sidelines may have missed the gains in the US stock market. As of the end of October, the S&P 500 was up more than 20% for the year on a total-return basis. That puts it on course for the best showing since 2013 should that gain hold through December.
Trade War Predictions: Expectations vs. Reality
The trade war was one of the most closely watched economic stories entering 2019. Many forecasters anticipated a resolution—perhaps some version of a “Phase 1” deal—by the end of the year, with hopes that tensions between the US and China might finally subside. Expectations ran high that ongoing negotiations would break the stalemate, particularly with the 2020 US presidential election on the horizon. Conventional wisdom suggested that resolving the trade war could offer a political and economic boost in an election year.
What actually played out was far less straightforward. As the months unfolded, the dispute between the two countries proved more persistent than anticipated. Each new headline seemed to tilt sentiment back and forth, causing notable volatility in global markets. Rather than winding down, the tit-for-tat tariffs and heated rhetoric often escalated, with neither side eager to concede or accept terms quickly.
Political considerations appeared to play a growing role, as the US administration balanced applying pressure with showing flexibility. Yet, despite early predictions, the anticipated breakthrough failed to materialize within the expected timeline. As 2019 drew to a close, the trade war remained unresolved, a vivid example of just how difficult it can be to forecast market-moving global events—even when the stakes seem clear.
The Prediction Game Can Be a Losing Game
The Greek stock market swung from a 37% decline last year to a 37% advance this year.
Outside the US, Greece—the site of an economic crisis so dire some expected the country to abandon the euro earlier this decade, and a country whose equity market lost more than a third of its value last year—has had one of the most robust stock market performances among emerging economies in 2019. On top of that, Greece issued bonds at a negative nominal yield, which means investors paid for the privilege of lending the government cash.
Taken as a whole, it’s a reminder that the prediction game can be a losing one for investors.
How Often Do Recessions Really Happen?
Recessions have a way of sneaking into nearly every decade. In fact, if you glance back at the last century, you’ll spot at least one downturn cropping up every ten years—with only rare exceptions. As we neared the close of this most recent decade, many market watchers started to notice something unusual: the economy managed to sidestep a recession altogether during these ten years.
So, are we overdue? It’s a common refrain among commentators and investors alike. While history doesn’t deliver an exact schedule, the absence of a recession this decade has left some anticipating a potential downturn looming on the horizon. Whether the trigger comes from economic fundamentals or unforeseen political events, the lesson is the same: while downturns are a natural part of the cycle, trying to predict exactly when they’ll hit can be just as unpredictable as markets themselves.
Apple’s Market Value—Predictions vs. Reality
Looking back, 2019 wasn’t just a year of surprises for bond yields and Greek equities; even the giants of tech saw their share of unexpected milestones. Early in the year, expectations around Apple’s market value ran the gamut—from a mere return to the $1 trillion mark, to potential new record highs. By year’s end, Apple didn’t just meet those forecasts—it outpaced them. The company’s valuation surged past $1.18 trillion, outpacing other tech titans like Microsoft along the way.
Apple’s share price rallied by roughly 50% over the course of the year, making it a particularly rewarding period for shareholders. Given its earlier stumble, the recovery required the company to excel across all facets of its operation, and for the broader market to reward that performance. While some might have viewed such lofty targets as ambitious, Apple’s relentless innovation—especially in areas like augmented reality—helped solidify its lead.
The key lesson? Even predictions that seem bold, or even obvious in hindsight, carry risk in the moment. Apple’s rise serves as yet another reminder that markets can confound just about anyone willing to make a forecast.
Up or Down?
A closer look at interest rates and the bond market shows just how unpredictable asset performance can be. Going into 2019, Federal Reserve officials expected economic conditions to support raising a key interest rate benchmark twice. Instead, policy makers lowered it three times.
In the market for US Treasuries—where market participants set interest rates—the yield curve that tracks Treasuries inverted for the first time in more than 10 years, as seen in Exhibit 1. Some long-term yields fell below some short-term yields over the summer. What’s more, yields on medium- and long-term bonds were at historically low levels at the start of the year, but they fell even lower by the end of October. Investors who made moves based on the expectation yields would rise in 2019 may have been disappointed in how events ultimately transpired.
Signs of a Potential Recession
If the unpredictable swings in markets have taught investors anything, it’s that forecasting economic downturns is fraught with uncertainty. Yet, certain indicators can suggest when a recession may be looming.
Historically, recessions have typically occurred at least once each decade—a pattern that underscores how inevitable economic cycles can be. As we approach another decade’s close without one, some market watchers argue that we’re overdue for a slowdown. But pinpointing the timing or cause remains elusive.
Several factors may contribute to a possible downturn:
Ongoing Trade Tensions: Prolonged disputes between major economies can unsettle global supply chains, dampen corporate profits, and weigh on investor sentiment.
Political Uncertainty: Elections and shifting government policies often lead to market volatility. Depending on outcomes and subsequent policy adjustments, this uncertainty can spill over into consumer and business confidence.
Yield Curve Inversions: When long-term interest rates fall below short-term rates—as they did this past year—it has historically been a harbinger of recession. While not a guarantee, it’s a signal markets watch closely.
Extended Economic Expansions: Lengthy periods of uninterrupted growth can sometimes sow the seeds for a pullback, as markets inevitably adjust to new realities.
Of course, whether economic headwinds stem from underlying fundamentals or from shocks—political, financial, or otherwise—few would be shocked by a correction after this extended run. The lesson, as always, is that markets can confound even the most informed predictions.
Events weren’t any easier to anticipate in the global equity markets, where no evident link appears between markets that performed well last year and those that have excelled this year, as Exhibit 2 shows.
Among the 23 developed market countries,(2) only one country was a Top 5 performer for 2018 and 2019: the US. Last year’s strongest performing market— Finland—ranked 22nd this year through the end of October. Among emerging markets, Greece swung from a 37% decline last year to a 37% advance this year through the end of October.
Weighing the Opportunity Cost of Holding Cash
When markets seem expensive, investors often wrestle with the decision to deploy cash or keep it on the sidelines. Holding significant amounts of cash has its appeal—it offers flexibility and can buffer against turbulence. However, letting too much cash sit idle comes with its own cost: the missed opportunity to potentially earn returns elsewhere.
Consider the alternatives: cash today generally earns little, particularly after accounting for inflation. Meanwhile, even in markets perceived as overvalued, a diversified portfolio of investments may still generate meaningful returns over time. For long-term investors, the cost of sitting out—missing compounding growth—can quietly erode purchasing power.
The challenge is finding a balance:
Flexibility vs. Growth: Holding cash provides optionality if asset prices fall, but it can mean sacrificing steady, long-run gains that come from staying invested.
Market Timing: Successfully predicting the perfect moment to put cash to work is exceptionally difficult, as past years’ market swings have demonstrated.
Diversification: Rather than making an all-or-nothing bet, spreading investments across assets can help manage risk during periods of uncertainty.
In the end, investors must weigh the potential regret of missing out on future growth against the comfort of having cash in reserve—a trade-off that remains as unpredictable as the markets themselves.
Banks Beat the Odds
In the context of unpredictable markets, bank stocks offered another twist in 2019. Despite conventional wisdom suggesting rate cuts would squeeze bank profits, banks not only held their ground—they outperformed much of the broader market. With the S&P 500 posting strong gains, banks managed to edge even higher in total returns by late in the year.
So why did banks fare so well when rate drops typically spell trouble for them? A closer look reveals that the story isn’t just about rates. Instead, steady growth in bank lending and deposits played a critical role. Consumers continued to show confidence, driving demand for auto loans, mortgages, and personal loans. The result: banks expanded their loan books even as their interest margins came under pressure.
In addition, improvements to credit scoring systems meant more borrowers qualified for loans, further driving growth. Stable employment and healthy consumer finances added to the momentum, as did banks’ focus on growing low-cost deposit bases to offset lower rates.
Ultimately, fears of disappearing bank growth never materialized. Rather than falter, banks adjusted, finding new avenues for business. If anything, they’ve positioned themselves for future recovery should rates move higher again.
This serves as yet another reminder: markets, like bank stocks in 2019, often defy expectations—highlighting the perils of trying to base investment decisions on prediction rather than preparation.
Bank Stocks Buck Expectations
Bank stocks offered a particularly striking example of market unpredictability in 2019. After ranking among the weakest performers in 2018, this sector rebounded sharply, delivering total returns that outpaced even the broader S&P 500—rising around 30% while the overall market gained about 27% over the same period.
What makes this reversal even more surprising is the backdrop of falling interest rates. Typically, banks face headwinds when rates decline, since their earnings often benefit from a higher-rate environment. Yet even in a year marked by multiple rate cuts, bank stocks managed to surge ahead, defying common expectations about how such policy shifts would impact their profitability.
Perennial Wisdom
History has shown there’s no compelling or dependable way to forecast stock and bond movements, and 2019 was a case in point. Neither the mainstream prognostications nor the hindsight of recent strong performance predicted outcomes in 2019. Remember, the prediction game is not the most appropriate in this context.
Rather than basing investment decisions on predictions of which way debt or equity markets are headed, a wiser strategy may be to hold a range of investments that focus on systematic and robust drivers of potential returns.
Investors who were broadly diversified across asset classes and around the globe were in a position to potentially enjoy the returns that the markets delivered thus far in 2019. Last year, this year, next year—that approach is a timeless one.
Valuations and Strong Fundamentals: A Closer Look
When considering whether to invest in companies that seem expensive on traditional valuation metrics, it’s useful to remember that the market often attaches a premium to businesses with resilient models or consistent growth. Companies boasting strong recurring revenues or those that foster repeat customer engagement may trade at a higher price—sometimes justifiably so. These firms might rarely, if ever, look “cheap” in the conventional sense, but for good reason: their underlying fundamentals can continue to drive value for investors over the long run.
On the other hand, concerns about overpaying are far from trivial. Allocating significant capital to businesses with high valuations can expose investors to the risk that growth expectations may not materialize as projected. Should fundamentals deteriorate or enthusiasm wane, previously lofty prices can lead to underwhelming results. This is why maintaining discipline—assessing both the quality of the business and the price paid—remains important.
Yet, investors holding large amounts of idle cash face a dilemma. Keeping funds on the sidelines during periods of high valuations may feel prudent, but it can also mean forgoing the potential gains offered by robust, well-run companies. There’s an inherent “opportunity cost” to sitting out the market, especially when quality businesses continue generating results year after year.
As with predicting market moves, the decision isn’t clear-cut or formulaic. Rather than relying on valuation alone or simply chasing what appears inexpensive, maintaining diversification and focusing on sound, long-lasting business fundamentals can help balance the desire for caution with the need to put capital to work productively.
Footnotes and References
(1) Based on readings from the Conference Board Consumer Confidence Survey and the University of Michigan Index of Consumer Sentiment.
(2) Markets designated as developed or emerging by MSCI
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
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