Navigating the Courts of Finance: NBA All Stars, Predictions, and the Perpetual Game
By Dr. Robert Votruba
According to the National Federation of State High School Associations, almost 600,000 boys participate on high school basketball teams. However, less than 5% of these athletes move on to play at the collegiate level, with a fraction of that, less than 1%, competing on Division I teams - the highest level . Despite their exceptional skill, only 1% of Division I players manage to reach the NBA, which employs around 550 players across all teams. The trajectory for female basketball players follows a similar pattern. Simply labeling professional basketball players as "the best of the best" fails to capture the extent of their talents and the obstacles they've overcome. Among this elite group are about two dozen individuals with extraordinary abilities – the All Stars.
Similarly, the financial services industry has its own All Stars, or so it seems. The odds of reaching the top of the mountain in the world of finance are just as daunting as those that basketball players face. However, unlike athletes, these titans of markets and economics find their supporters much more forgiving for the occasional “bad game” or even a “bad season.” To be fair, the game of finance involves predicting the unpredictable, which is arguably more challenging than sinking a regulation NBA 3-pointer. Predicting the short-term direction of financial markets is the equivalent of the half-court shot in the NBA (of which, approximately 1 in 100 are made). Yet, that doesn’t stop analysts, bankers, economists and even those who have no formal education or experience in finance from trying. Complicating matters further, the landscape of markets became even more complex since the Federal Reserve initiated a historic battle with inflation, raising interest rates 11 times between March 2022 and last summer.
Historically, financial markets subjected to such steep rate hikes have sometimes faced challenges like recessions, bear markets, and high unemployment. Back in 2022, Fed Chair Jerome Powell surmised that there was only a narrow path to reduce inflation without driving the U.S. economy into a recession – the so-called “soft landing”. Since then, the Fed’s goal has been straightforward in theory, albeit challenging in practice: bring inflation back down to 2%, maintain full employment (around 4%), and steer clear of a recession.
Larry Summers, an economist, former U.S. Treasury Secretary, and ex-president of Harvard University, is undeniably an All Star. Graduating from both M.I.T. and Harvard, his insights carry weight. In 2022, he suggested that to curb inflation, we might need “…two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment.” He also expressed skepticism about achieving a soft landing.
Although the verdict on a soft landing may still be pending – though Allan Blinder, former Fed Vice Chair and Princeton Economist, recently claimed, “The Fed has already achieved a soft landing” – the job market has defied expectations. Contrary to Summer’s forecast, unemployment has remained under 4% for two years, the longest streak since the 1960s . Simultaneously, inflation has been inching back toward the Fed’s target, and the economy grew at over 3% in the last quarter of 2023 – all signs of a soft landing. Of course, while never welcome, recessions are a normal part of the business cycle, so eventually there will be one. It’s just might not show up for a while, and waiting for one on the sidelines is far too costly of a strategy.
Many other renowned figures have been misled by the economy's resilience. JPMorgan CEO Jamie Dimon recently cautioned of a potential financial storm. The banker warned that it could be a “minor one or superstorm Sandy…You’d better brace yourself”. Yet, in 2023, our economy experienced its fastest growth since the COVID rebound.
Ray Dalio, who heads the world's largest hedge fund and is a billionaire many times over, is another MVP-caliber player in the finance world. However, he too has been confounded by recent economic events. Last year, he predicted a looming debt crisis and a "perfect storm" of economic hardship. But in a recent interview, he admitted, “I got it wrong.” In February, he penned an essay addressing concerns about a possible stock market bubble, concluding that he doesn't believe one exists. Check it out here: https://www.linkedin.com/pulse/we-stock-market-bubble-ray-dalio-zpdre/
Yes, despite the dire predictions, and against all odds, the market and the economy have been resilient. Most major stock indexes hover near all-time highs, and while mostly flat on the year, bonds offer attractive yields. Real estate prices in most regions are at record levels, as is the price of gold. The S&P 500 hit its all-time high 22 times in this year’s first quarter, the most to start a year since 1998. This most recent unexpected rising tide has lifted all boats – as long as they were in the water.
Strong gains early in the year are usually a good sign for investors. Over the past 75 years the market has gone on to produce further gains in years where the S&P 500 climbs 8% or more in the first quarter, as it has this year. Moderating inflation, potentially falling interest rates and strong corporate earnings all provide a favorable backdrop today. Of course, that is not to say the ride between now and December 31 will be a smooth one. Remember, on average we experience one correction (a decline of 10% or more) per year.
Things could also get bumpy if the Fed does not reduce rates as expected. As things stand today, expectations are for three rate cuts between now and December 31. However, if the economy continues to show strength, those rates cuts could be put on hold. Though the market has been eager for these reductions, our economy and markets can perform just fine without them. When it comes to interest rates, there is likely a recency bias affecting perceptions of where things are today. Those who view rates as high, are comparing them to the last 14 years or so, a period of major economic turmoil. Remember, the Fed first drove rates to zero after the financial crisis in 2008, and just when they began to bring rates back to normal, COVID struck. No matter which economy theory you follow, “zero” is not a normal interest rate. A longer-term view tells a different story – that rates are in line, if not a touch below, historical averages.
While market volatility has been subdued thus far in 2024, as election day approaches this trend is sure to be tested. Perhaps if investors knew how little impact Presidents have had on investment returns over the long term, this wouldn’t be the case, but given today’s political environment it’s not easy for some to separate their political views from their investing strategies. Interestingly, one’s perception of how the economy is doing is strongly influenced by his/her political affiliation. That is, Republicans think the economy is doing well when a Republican is in office, and Democrats think the same where their party is in control of the White House. This is true despite how the economy is actually performing.
Though this year’s Presidential candidates will likely highlight their differences in tax policy, Democrats and Republicans have been converging over the years on other major economic issues such as spending and foreign trade policy. Both have endorsed some form of “onshoring” jobs, and both parties seem unwilling, or unable, to address the deficit and our ever-growing debt burn which now hovers near 100% of GDP, a level not seen since WWII. Some fear that this will put downward pressure on the U.S. Dollar, while other doomsdayers have pointed to our spending as an early sign that the Dollar will soon no longer act as the world’s preferred reserve currency. While most of us understand that spending more than you make has consequences, when the borrower can print their own money, understanding the repercussions are difficult, especially when our economy is on stronger footing that virtually all other developed nations. Despite some predictions of the Dollar’s demise, nearly 60% of world currency reserves are held in U.S. Dollars, the highest percentage since 1990. The next closest is the Euro, at 20%. All others are well below 10%. And, the U.S. in involved in almost 90% of all foreign-exchange transactions.[1] Compared with other nations, fiscally speaking, the U.S. is still the “cleanest dirty shirt.”
With markets near all times, an election only months away, two wars being fought, and a giant deficit, one must wonder, despite Ray Dalio’s prediction that we are not in a bubble, if we are near the top. Potential investors are often fearful of entering markets near their highs, and with interest rates on safe vehicles like savings accounts and Treasury Bills attractive, the sidelines seem quite comfortable. Paradoxically, when compared to investing on any random day, investors have been rewarded more when investing at new highs (see chart below). That’s because all-time highs are more common than perceived. According to JPMorgan, since 1988, the S&P has, on average reached new highs 20 times a year. More importantly, nearly 85% of the time the market was higher one year later[2].
Source: FactSet, Stanadard & Poor’s, J.P. Morgan Asset Management. Average cumulative S&P 500 total return date from January 1, 1998 to January 29, 2024
While trying to compare famous financial minds to athletes might be entertaining, the games they play are quite different. A professional basketball game lasts about two hours (with commercials, time outs and the halftime break) and is over at the buzzer. It has a winner and a loser. On the other hand, while investors have goals with a finite time frame, like retirement, the game never really ends. Yes, strategies change as goals near, but we will likely always be investors. And unless you are a day trader, you are only competing with yourself, your emotions, and the urge to react to newsfeeds that highlight experts’ predictions that are likely wrong. The next time you get a feeling you know which way the market is headed over the new few months, remember that even those at the top of the food chain often get it wrong. Or, in basketball parlance, if the very best All Stars can’t consistently make that half court shot, why do those who are not NBA players think they can?
Economist Daniel Kahneman is a Nobel prize winning economist credited for demonstrating how psychology and financial decisions interact. The pioneer of Behavioral Economics, Dr. Kahneman passed away at the age of 90 on March 27, 2024. Though he introduced many groundbreaking theories and insights, his most powerful advice, was simple: “All of us would be better investors, if we just made fewer decisions.”
[1] Morningstar
[2] J.P. Morgan Asset Management
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. National Financial Network is not an affiliate or subsidiary of PAS or
Guardian. CA Insurance License Number - 0D23495. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results. S&P 500 Index is a market index generally considered representative of the stock market as a whole.
Opinions are those of the author and not necessarily those of Guardian or its subsidiaries.
2024-172481 Exp 04/26
