The rising interest rate prediction has been the most incorrect forecast I can remember. For the past three years, we have heard various economists, market experts, and large investment managers warning of higher interest rates. The herd can often be correct, however, this time they’ve been wildly wrong. More concerning is the inability or unwillingness to adjust their investment thesis. I call this the broken clock approach to forecasting (also known as anchoring bias, confirmation bias). This isn’t about being correct or incorrect. The market has a funny way of making us all look foolish. This is about the process of building sound capital market expectations and challenging your thinking. When I feel strongly (positive or negative) about an asset class or economic data point, I know another investor has the same strong feelings in the opposite direction. Taking the opposition viewpoint can help work through biases and provide a better understanding of the range of possible outcomes.
The other factor at play is the Wall Street preference of being right or wrong together (known as the herd mentality). Virtually all of the large investment managers and banks have predicted interest rates would rise. This isn’t by accident. If the herd is right they can tout their forecasting ability. If the herd is incorrect they were wrong with everyone (borrowing a familiar phrase from 2008…’no one saw this coming’).
A savvy investor should have conviction in their investment thesis, but should be willing to pivot if the facts on the ground change. In my opinion, interest rates will be lower for longer than most expect (I’ve been saying this to clients for years), but even a broken clock is right twice per day.