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How is one to make sense of the disparate Wall Street market forecasts?  At the top end of the range, BMO is predicting a 2021 ending value for the S&P 500 of 4800 – an over 9% increase from today’s price.  In contrast, Duetsche Bank’s forecast for the S&P 500 is to close at 3950, a drop of over 11%.  And within the S&P 500, which stocks will be the out-performers and which ones will lag?  As an investment manager we often look past ever-changing forecasts to concentrate on financial and economic relationships that have held up through time. We look to take advantage of correlations across asset classes in an effort to reduce portfolio volatility. Look here for a more expansive firm forecast list https://www.cnbc.com/market-strategist-survey-cnbc/.

Here is a hypothetical question for the reader:

What will each statistic in the table below be from today’s date through 2025?

The reality is no one can forecast or predict with confidence the stats above. Yes, one could study each company, perform in-depth analysis and increase their self-confidence in the prediction, but the prediction would still be very weak. This begs the question if there is anything we could say with a higher-degree of confidence about the stats above? Possibly.

With a higher degree of confidence, we could predict that from today through to 2025, Uber and Lyft will be more correlated with one another than with Netflix. Why? Because their businesses are more similar (transportation / ride-sharing), and thus their stock prices will correlate more closely to each other than with a subscription-based streaming service. Bottom line, their underlying economics are more similar!

In what other areas of the market can we apply relative performance forecasting?  A few areas quickly come to mind:

  • Relative to other asset classes, stocks will likely continue to offer the highest return over long-term time horizons (greater than 20 years).
    • Stocks as measured by the S&P 500 Total Return Index have outperformed the Bloomberg US Aggregate Bond Index in 306 of 308 20-year rolling periods since January 1976.
    • Over the same period versus gold (measured using LMBA Gold Price), stocks have outperformed in 254 (82%) of 308 periods.
    • Compared to U.S. long-duration Treasuries (measured using the Bloomberg US Long Government Float-Adjusted Bond Index),  stocks have outperformed in 234 (76%) of 308 periods.
    • So if you’re betting on a horse in this race, stocks are a pretty good starting place.
  • US Treasury bonds will likely continue to serve as a flight to safety investment choice during times of high stock market volatility, for example, during recessions.
    • The table below shows the correlations between the S&P 500 Total Return Index and the Bloomberg US Long Government Float-Adjusted Bond Index during periods where the stock market return was negative across various time periods. The negative correlation highlights the fact that when stocks decline, Treasuries tend to go up in value.

    • The chart below provides a more visual representation of this relationship. The blue line plots stock market declines (S&P 500 Total Return Index) from prior peaks starting in January 1977. The green line plots the return sequences of the Bloomberg US Long Government Float-Adjusted Bond Index during those periods where the stock market declined from its prior peak.

However, these relative performance relationships do not always hold true.

  • We can still expect the unexpected . . . and often.
    • While being a student of history and understanding the relationship dynamics of economic and market metrics is important, we should also be comfortable with the unexpected and keep an open mind.
    • Records are meant to be broken. In 2020, the stock market (S&P 500) experienced its fastest decline and recovery ever.
    • Bitcoin was created in 2009 and has catalyzed an entire new asset class of digital cryptocurrencies.
    • Federal governments may have formed a new playbook for responding to economic crises during the Covid 2020 pandemic, for example, direct stimulus payments.
  • Questions often beget more questions.
    • Value investing has historically outperformed growth investing, but its recent long-term underperformance raises doubts, is that expectation valid anymore?
    • Gold has historically been seen as an inflation hedge, but many believe cryptocurrencies will feel the void, will gold become obsolete?

Can you think of any economic and market relationships that have a high degree of holding in the future? And how about unexpected developments or scenarios? And those questions that raise more questions?

Maybe this is why investing is both so fun and challenging. In constructing our portfolios, we will continue to evaluate the historical relationships of economic and market forces in the context of a changing world.



General Disclosures: The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer trading decisions.  All expressions are as of its publishing date and are subject to change.  There is no assurance that any of the trends mentioned will continue in the future.  Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of trading advice or guarantee of future results.  Certain information contained herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Any reproduction or distribution of this presentation, as a whole or in part, or the disclosure of the contents thereof, without the prior consent of Cardan Capital Partners, LLC, is prohibited. Investments in securities entail risk and are not suitable for all investors. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

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