A study of history teaches us that “the financial markets periodically undergo profound sea changes, after which they bear little similarity with what came before.” This according to a recent MarketWatch article by contributor Mark Hulbert.
The article references an interview with Global Financial Data chief economist Bryan Taylor, who believes the market are currently experiencing “another of these sea changes.” Taylor, who expects persistently low interest rates going forward, believes we are entering uncharted territory: “His best guess,” the article reports, “is that the equity premium going forward will be small—around 3%. If so, U.S. stocks in this era that is dawning will produce returns that are, at best, mediocre.” Taylor stipulates, however, that his estimate is “only a dart-throwing guess,” emphasizing that guessing is the best that most of us can do.
And the guessing, Hulbert says, doesn’t become more accurate by studying more history: “If we based our forecasts on what’s happened over the last four decades,” he writes, “we’d project an equity premium of 1.33 annualized percentage points. We can torture the data to project a higher equity premium if we extend our analysis back to World War II, or a much lower premium if we extend it even further back to 1972.”
If the financial markets are “instead a progression of profoundly different eras that bear little resemblance to each other, then analyzing more history doesn’t necessarily produce more insight,” he argues, concluding, “Those who project confidence because of how much history they’ve included in their models are like those who are often wrong but never in doubt.”