Stock market & politics: The illusion of certainty?

I leaned back in my chair and smiled. Tom had always been a bit impulsive and tended to jump to conclusions. “You know, my friend,” I began, “in the stock market, as in politics, anything is possible. Let me explain that to you in more detail.”

Predictions in the realm of uncertainty

In my many years as a financial expert, I have learned one thing: whenever psychology, irrationality and chance are involved, it is extremely dangerous to rely solely on forecasts. And this is exactly what applies to politics, the economy and especially the stock market.
Because, even if the truth may hurt, no expert in the world can correctly factor in all the known influencing factors plus the unknown coincidences in a forecast. That’s why I advise investors and anyone who depends on macroeconomic developments to avoid terms such as “with certainty”, “always” and “never” as far as possible. Otherwise, you could quickly fall flat on your face with your money and your predictions – both on the stock market and in politics.

On the stock market & in politics: learn from the past

“Do you remember the 2016 US election?” I asked Tom. “Back then, almost everyone agreed that Hillary Clinton would win hands down. But if Trump won against all expectations, the stock market would crash. Well, and then Trump won – and the stock market rose by over 30 percent in the following 14 months! Some people were really looking down the tubes.”
Most experts were also completely wrong about inflation. In mid-2022, a recession was considered virtually unavoidable due to the Fed’s interest rate hikes. But it has not yet materialized. Instead, optimism at the end of 2022 even triggered a rally on the markets that is still going strong. Well, experts are only human and sometimes they are terribly wrong.

Psychology & emotions as driving forces on the stock market & in politics

“You see, Tom,” I said, “we just don’t know what’s going to happen. Even less how the markets will react. The psychology and emotions of investors are far too unpredictable, both on the stock market and in politics.” Markets fluctuate more than the real economy. Why? Because the psychology and emotions of market participants play a huge, unpredictable role. Investor sentiment is changeable and overrides the influence of fundamentals in the short term. Due to the many variables and psychological factors, very few market forecasts turn out to be correct, and even fewer for the right reasons. As the famous economist John Kenneth Galbraith said: “There are two kinds of forecasters: those who know nothing and those who don’t know that they know nothing.” I had to smile a little myself.

The path to investment success – how the stock market and politics are connected

“You know what, my friend,” I finally said. “Instead of always relying on forecasts, I recommend first and foremost a solid, broadly diversified investment strategy. Think long-term and remain patient, even when the markets are turbulent. The easiest way to do this is with a professional asset manager at your side. That way, you’ll achieve the best returns in the long term – regardless of who ends up in the White House.” I could hear Tom sigh. “Okay, that makes sense. It doesn’t sound as spectacular as I had imagined. But you’re probably right. Thanks for your honest assessment, Mark!” As I hung up the phone, I had to smile. Sometimes it’s better to play it safe than to succumb to the lure of supposedly surefire predictions – both in the stock market and in politics. In a world full of uncertainties, this is perhaps the most valuable lesson I can pass on as a financial expert.

Yours, Mark Stock©

Mark Stock is a member of the Point Capital editorial team. “I am a stock market enthusiast and am passionate about economic history. I have been following the ups and downs of the markets for years and, of course, invest myself – preferably in shares. So my name says it all. Every month, I take up what I consider to be an exciting topic. And since the focus is on the content and not on me personally, I write under a pseudonym.”