Favorite Investing Charts

Hi Reader,

Today, I’m sharing five of my favorite investing and economic charts from the past month.

These charts cover topics like:

  • The Futility of Forecasting
  • Emerging Market Stocks
  • Predicting Interest Rates...and More!

Let's dive in.👇

#1 - Predicting The Future Is Hard

An inverted yield curve is widely touted as the mother of all “recession indicators.”

In other words, when the yield curve "inverts," it indicates that a recession may be near.

💡 What Is An Inverted Yield Curve?

It's when short-term bonds (safer) have a higher yield than long-term bonds (riskier). This happens when there is more demand than normal for long-term bonds, signaling that economic trouble may be around the corner.

» Learn what an Inverted Yield Curve Means for Retirement Investors

The yield curve has been inverted for ~2 years—the longest inversion in history—and yet, still no recession.

We could say that a recession is still coming, but at some point, being early is indistinguishable from being wrong.

And that's important because, when the yield curve initially inverted...

...many investors used it as a reason to sell their stocks, thinking that a market decline was imminent.

Anyone who panic-sold U.S. stocks two years ago missed out on ~40% of gains from that part of their portfolio.

Yikes. 😬

Regardless of the track record of any investing or economic indicator, the future is surprising more often than not.

#2 - Predicting The Future Is Hard (Part 2)

What is the Fed going to do with interest rates this year?

Investors love to share their predictions, but as the chart below illustrates, they are almost always wrong.

The dark line below represents the actual Federal funds rate (a.k.a. U.S. interest rates).

The orange squiggly lines represent where the futures market predicts where interest rates are headed.

Notice that there's almost no correlation which should encourage us to ignore these types of forecasts.

As I've said many times:

Not even the Fed knows what the Fed is going to do.

#3 - Predicting The Future Is Hard (Part 3)

Adding to the list of forecasting failures are the so-called "experts" predicting where the stock market will end the year.

Based on their December forecasts, the market currently exceeds 19 of the 20 forecasters' year-end price targets, many by a considerable amount.

It's possible that the market retracts from here, but so far, these "predictions" are on track to be a big miss (once again).

#4 - Why We Diversify

For more than a decade, Emerging Market stocks have underperformed U.S. stocks.

As a result, Emerging Markets are now at their lowest relative valuation in 22 years. 🤯

This underperformance brings up the question:

“What happened the last time Emerging Market valuations were this lopsided?”

Emerging Market stocks experienced a similar period of underperformance in the 1990s.

However, frustrated investors who stayed the course reaped the benefits from 2001 to 2010, when Emerging Markets averaged ~16% per year.

(U.S. stocks, during that same period, averaged ~1.5% per year.)

While this level of outperformance may not repeat itself, diversification remains important because we will never know in advance where the best returns will come from.

#5 - Volatility Is Normal

Every 5% pullback in the market is routinely advertised as the beginning of the end.

However, it turns out that these pullbacks are more common than many think:

"Since March 9, 2009 -- when stocks bottomed following the Global Financial Crisis -- we count 28 previous pullbacks of at least 5% for the S&P 500.
Impressively, despite these setbacks, stocks are up 644% on a price basis and 900% including dividends over that entire period." ~Keith Lener

As we like to say, volatility is the price we pay for returns.

Bottom Line

As the charts and commentary above suggest, one of the greatest risks to our portfolios is acting on the forecast of some supposed expert.

No matter how confident they may sound, their crystal ball is just as useless as everyone else’s.

And for all the time spent on forecasts, predicting the future is, at best, unnecessary.

You need only to look briefly at the market's long-term path to see that the greatest risk of all was not staying invested.

This has been the case throughout history, and I suspect it will continue to be just as true in the decades ahead.

Stay wealthy the course,

Taylor Schulte, CFP®

When You're Ready, Here Are 3 Ways I Can Help You:

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Taylor Schulte

I'm the host of the Stay Wealthy Retirement Show and founder of Define Financial, an award-winning retirement and tax planning firm. When I’m not helping people lower their tax bill, you can find me traveling with my wife and kids, searching for the next best carne asada burrito, or trying to master Adam Scott’s golf swing.

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