Don’t expect anyone to ring a bell at the bottom

Don’t expect anyone to ring a bell at the bottom

Investors have endured one of those years that tests patience and fortitude as share markets have ridden waves of despair and optimism. At its worst this year the Australian market was down more than 15 per cent from its highs, but the bellwether US markets have been rocked, with the S&P 500 down almost 26 per cent at its worst and the NASDAQ 33 per cent.

As is typical with bear markets, we’ve also seen some decent rallies, like June to August which saw an 11 per cent rise in the ASX200 and 18 per cent in the S&P 500.

Share markets are in the midst of another rally now, and the inevitable, and unanswerable, question on every investor’s mind: is this just another bear market rally or do we get on board?

It’s at times like this that smart investors might look to experts for authoritative insights on what to expect from financial markets. The reality is, however, none of those experts are completely reliable.

Central banks

The correction in financial markets this year was prompted by central banks, especially the US Federal Reserve, aggressively raising interest rates to tackle inflation. Yet on 29 June this year, the Governor of the US Fed, Jerome Powell, told a European Central Bank Forum,

“I think we now understand better how little we understand about inflation.”

That brutally honest, but nevertheless disarming confession, comes despite the Fed having hundreds of PhDs with access to the best information sources available.

Similarly, in 2012 the Fed started releasing where each governor expected interest rates and inflation to be over the coming three years, which came to be known as the ‘dot plots’. But it became clear the governors’ best guesses weren’t much better than anyone else’s, prompting Powell to say,

“The dots are not a great forecaster of future rate moves…just because it’s so highly uncertain. So, dots are to be taken with a big grain of salt.”

Likewise, you need only recall the now notorious reassurances from our own Reserve Bank as recently as November 2021 that interest rates would stay low until 2024, only to unleash the most aggressive rate rise cycle in decades six months later.


Economists’ opinions are often quoted not only for economic issues, like the outlook for inflation and unemployment, but financial markets as well. But in 2018 the IMF examined economists’ GDP forecasts for 63 countries over the 22 years to 2014 and found on average only 3 per cent forecast an impending recession eight months ahead of it actually starting, and only 9 per cent three months ahead.

Even Nobel Laureate, Ben Bernanke, the former Governor of the US Fed, said in May 2007 that subprime mortgage issues ‘wouldn’t seriously hurt the economy’. Only four months later the US share market began a 50 per cent dive, and those same loans led to the Global Financial Crisis.

Financial analysts and strategists

Most financial strategists will tell you that making forecasts about what markets will do over the next year is a mug’s game. There are simply too many variables, the most unpredictable of which is human sentiment, making the room for error enormous.

One study looked at the average S&P 500 forecast made by the 22 chief market strategists of the biggest banks and brokerage firms in the US from 2000 to 2014 and found the average miss was 14.6 per cent. That’s in absolute terms, meaning if the share market rose 10 per cent, the average forecast was for either 24.6 or -4.6 per cent.

Currently, many analysts argue share markets can’t have bottomed until corporate earnings have been downgraded enough to reflect the likelihood of a recession coming next year. So far US earnings forecasts for 2023 have been reduced by roughly 7 per cent, however, the S&P 500 was down by almost 26 per cent. It’s impossible to know if that difference wasn’t the market already factoring in lower earnings.

Experts may sound like they’re certain about where markets are headed, but in reality, they’re guessing like anybody else. If investors opt to wait for more ‘clarity’, by the time it comes, the markets will have already moved. The best option is to have a long-term plan and stick to it, because, as the truism goes, they don’t ring a bell at the bottom.

If you would like to discuss your investment options, please get in touch.