Why you need to know the difference between a forecast and a prediction
Throughout January, the US stock market has been falling away with the Dow Jones Index down around 4% while the S&P500 is down around 5% and the NASDAQ down more than 8%. Many experts are suggesting that this current weakness is an indication that these markets are crashing, but is this really the case?
While I agree that the US market is in a correction, this is vastly different to it crashing. I would also warn investors not to pay too much attention to the noise that we hear from experts because it can be misleading. Let me explain.
There is a vast difference between a forecast and a prediction, which investors typically misunderstand.
A forecast is what an expert believes will occur in the future based on what we know today. That said, we have no control over the macro elements that affect the economy such as COVID, interest rates or Government decisions that may affect the market. As such, we may change our forecast as new information comes to light, which may result in the original forecast changing.
A prediction, on the other hand, is a definite statement that something will occur in the future and this is where investors tend to make mistakes because all too often they make their investment decisions based on what they believe is a prediction rather than what might occur.
Let me share a story about one investor who contacted me in the last week, they remarked: "Unfortunately, I have watched too many US YouTube shows and as a result, early last year I pulled nearly 700k out of the stock market and put it into cash based on their outlooks; i.e. markets are in a bubble, stocks overpriced, mega crash coming."
The investor went on to say that being in cash for the last year resulted in them missing out on the gains they would have otherwise achieved in our market.
Given that the Australian and US markets have been falling over the past few weeks, investors have been looking to experts for answers. Let me be clear, right now the markets are not crashing, we are simply experiencing a normal cyclical correction and, as such, the S&P500 may fall 15% or slightly more from its previous high.
An important piece of advice that investors need to remember, you do not buy an index, instead you buy stocks. Therefore, regardless of what the market is doing, investors should only ever buy or sell based on what the stock is telling them.
Best and worst performing sectors this week
The best performing sectors include Energy up more than 2% followed by Materials up more than 1% and Consumer Discretionary, which is just in the green. The worst performing sectors include Information Technology down more than 2% followed by Healthcare and Financials, which are both down more than 1%.
The best performers in the S&P/ASX top 100 stocks include Worley up more than 7% followed by JB Hi-Fi up more than 6% while IGO, Northern Star Resources and Orica are all up more than 4%. The worst-performing stocks include BlueScope Steel down more than 6% followed by Medibank Private down more than 5% and Reece down more than 4% with many other stocks pulling back.
What's next for the Australian share market
Last week I mentioned that the All Ordinaries Index was not as bullish as we might like to think and this week's move confirmed that as our market is currently down. So, once again, I would encourage everyone to exercise caution when selecting stocks, as the current move down could last a few more weeks.
Given that our market has not experienced a major fall since the COVID crash in February 2020 and has only fallen around 6% on two occasions since then, we need to be mindful that the current fall may be longer in both time and price.
Given this, it is possible that our market will fall below 7,000 points. That said, one thing I would like to make clear is that I do not believe our market will crash this year, so investors would be wise not to make any rash decisions.
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