Does the future of the economy matter to investment returns?
Many managers, in an attempt to quiet the understandable fears of their clients, reply,
“In the long run, everything will work out,” – or something akin to it. They cite the average positive returns to stocks over a long period of time, note that even the sharpest market drops have eventually been not only recovered, but exceeded, and counsel not to worry.
Our answer is somewhat different: Of course the economy matters!
The problem is not that the direction of the economy does not matter to investment results, but that 1) it is nearly impossible to predict the short term direction of the economy with any accuracy, and that 2) investment returns are often completely uncorrelated with the actual state of the current economy, as markets attempt to look into the future and discount future expected returns. So that, even if we could predict the trajectory of the economy, it would be very nearly impossible to predict the trajectory of stock market returns. To read the entire report: The Investment House Quarterly 1Q15