What does the weather have to do with investing?
It is the time of the year where seasons change from winter to spring. This year, the weather has been unusual in all parts of the country.
Here in Edmonton, we were recently covered with more snow than we have had all winter. Normal temperatures at this time are about 15 degrees and we are struggling to get above 0 degrees. The strange weather patterns are not isolated to Edmonton. They are happening all across the country.
The markets can have some similarities to the weather:
- Just like the weather changes with the seasons, markets go through typical cycles.
- For most of us, we prefer the warm summer climate to the cold winter climate just like we prefer bull markets to bear markets.
- Snow in April and May is unusual. We don’t enjoy what is happening with the weather just like we don’t enjoy unusually long and painful bear markets like the one we just experienced. It has been one of the most painful bear markets in post-war history.
- Despite the unusual weather climate and the unusual market environment, the law of averages comes back into play (Statistically we call this regression to the mean). Current market conditions will not stay the same forever.
- Warm temperatures in Edmonton will come again just like bull markets will rage again, unfortunately, no one can pinpoint the exact timing. Keep in mind too that when the bull market returns, there is another bear market waiting for the cycle to change.
- Meteorologists try to provide forecasts about the weather just like investment professionals try to provide forecasts about the markets and the economy. Some are wrong and some are right. Neither is perfect.
- Weather predictions are usually expressed in terms of highs and lows. Market forecasts should also be given in terms of highs and lows. The shorter the time frame, the higher the variance should be between the highs and lows. In the investment business, return projections are usually expressed as long term averages. Take a look at the highs and lows in addition to the averages.
- Weather forecasts are always being revised just like market and economic forecasts.
- The markets always make sense in retrospect but difficult to predict for the future.
- Just because there is snow in April, it doesn’t mean that we are going to have snow all year? Often, when things are tough in the market, we tend to extrapolate bad news and conclude that things could get worse. Chances are, spring will, in fact, bring warmer weather just like the future will once again bring prosperous markets.
- While the weather we are having this year is unusual, there is always a reason why. The weather is always the same in that it is always different. Just the same, markets are always changing. Often you will hear that this time it’s different but understand that change is a regular occurrence in the market and despite the reasons, markets always go through their cycles. My point is that just like the weather displays continuous change, so does the market.
- Does the tough spring that we are having mean that we are going to have a lousy spring, summer, fall, and winter for the rest of the year? Does the tough spring mean that we are going to have great weather for the rest of the year? The answer to both questions is no one really knows. Forecasting the weather is just as difficult as forecasting the markets. Forecasting in this manner is oversimplified and dangerous. Experts will look at various quantitative data to try to make forecasts that are founded on research and expertise but even they struggle to be right all the time.
What does this all mean?
We can draw some analogies with markets to the weather. While there may be some similarities between the weather and markets, there are also many differences. The bottom line is don’t get carried away with trying to forecast the future. As I have shared with you some of my opinions, keep in mind that I am not an economist, futurist, nor market analyst. Take my opinions for what they are worth.