Was Biden’s Exit a Surprise to You?

It was to me. In the last 70 years only two sitting Presidents, Harry Truman and Lyndon Johnson, failed to run for a second term. I thought President Biden might drop out, but I wouldn’t have bet on it. I certainly wouldn’t have bet that he would have won the election in November.

Yet just two weeks ago on July 9th, Biden’s campaign chair, Jen O’Malley indicated to the NYT that there was “no doubt” that Biden would continue to run and would certainly win in November. Last week Howard Marks, co-chairman of Oaktree Capital, referred to Ms. O’Malley’s remarks as “The Folly of Certainty.” Politics, economics and investing have something very important in common- absolute certainty in these fields is a prescription for failure. All of these are impacted by irrationality, randomness and psychological fluctuations, making it impossible to predict the future reliably.

In July 1988, Michael Dukakis was leading George H. W. Bush by 17 percentage points. Bush won in a landslide- up by 8 points and carried 41 states. When the 2016 election rolled around, most people were certain about two things- (a) Hillary Clinton would win but (b) if Donald Trump won, the stock market would collapse. However, Trump did win, and the stock market went up 30% in the next 14 months.

In 2021, the Fed Reserve felt that the inflation then underway would prove “transitory” (temporary) and was likely to self-correct. When their certainty didn’t pan out, the Fed was forced to embark on a program of some of the highest interest rate hikes in history. As a result, by mid-2022, there was near certainty that the Fed’s rate increases would produce a recession. It seemed to make sense that high rates would shock the economy and that a “soft landing” was virtually impossible. Yet, no recession has materialized.

Then, in late 2022, the consensus shifted to the fact that inflation was coming down and the Fed would start to cut rates, which still hasn’t happened. Yet, this optimism started a stock rally that persists today. The June 2024 reading of 3% inflation now seems to indicate the first rate cut will be September. We don’t know for sure. We have our doubts.

At the same time, an investor who correctly predicted in October 2022 that Fed rate cuts might not happen for 20 months and stayed out of the markets has missed a gain of roughly 40%-50% in the equity markets over that time period. The rate-cut optimist who was absolutely wrong on the rate cuts and stayed invested in their asset allocation is much richer today.

Investment markets may be even more difficult to predict than economics and finance. We’ve featured blogs about Daniel Kahneman many times. Professor Kahneman, the “grandfather of behavioral economics”, received a Nobel Prize in Economics for demonstrating that investment decisions are not necessarily rational but instead are impacted by common human biases, including loss aversion, anchoring, overconfidence, recency, fear of missing out, and others.

For the next 15 weeks we will be subjected to all sorts of predictions about the upcoming elections. Many of their conclusions may seem logical or persuasive. Many will be made with a strong dose of certainty. John Kenneth Galbraith said there are two kinds of forecasters: “Those who don’t know and those who don’t know that they don’t know.”? Mark Twain said it this way, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” Voltaire may have said it best, “Doubt is not a pleasant condition, but certainty is absurd.” We agree completely.

Conclusion: In the fields of politics, economics and investing, making predictions with certainty is a loser’s game. At DWM, our keys for investment success include the following: ?Focus first on protection and second on growth. Next, adopt an asset allocation that is consistent with your risk profile and diversified-using various asset classes and styles designed to increase returns and reduce risk in the long run. And stay invested- missing out on even a few key days in a year can significantly reduce your returns. And lastly, stay disciplined. Be skeptical of predictions, especially those that come with the “Folly of Certainty.”

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