An eternity ago (around four months), financial market commentary was dominated by confident predictions of the investment implications of Trump’s second term and countless descriptions of the inevitable performance advantage of US equities. Since this point, we have seen markets behave in an almost entirely contrary fashion to most of these forecasts (I don’t remember hearing many people call for the outperformance of Chinese and European equities). The problem is no matter how many times we get taught the same lesson about the futility and danger of such behaviour, we just cannot help ourselves.

One of the reasons that we perpetually repeat the same mistakes is that investors are incredibly adept at moving on from the things that we were thinking, saying and doing in the past (even if it is the very recent past) as soon as something else happens. While this does help us avoid coming to terms with the painful realisation of how little we know, it doesn’t help us make better future decisions.

About those ‘Trump trades’

Back in November I wrote that trying to forecast the market impact of the US election was a ‘wretched idea’. This was not due to the sheer unpredictability of Donald Trump, but because the global economy and financial markets are unfathomably complex systems and trying to anticipate them is impossible with any degree of confidence or accuracy.

The very notion that there is a straightforward relationship between a binary event (such as an election) and a financial market reaction (a strengthening dollar) is absurd. There may be self-perpetuating short-term reactions to such occurrences – investors trade based on what they think other investors will do – but, after this, things get incredibly messy, very quickly. Complex systems – like economies – are defined by being comprised of many component parts that interact with eachother, often in entirely unforeseeable and chaotic ways.

The issue is not that some of the higher profile ‘Trump trades’ look wrong at the moment – nobody knows how markets will progress from here – but that this type of investment thinking is totally at odds with reality.

European equities – dead or alive?

It may be hard to believe now, but the general sentiment around European equities in 2024 was almost uniformly negative. The sluggish European economy was blighted by bureaucracy and regulation, and their financial markets would never allow for the growth of hugely profitable technology-orientated firms like the Magnificent 7 in the US. Why would anybody invest in a laggard like Europe?

Well, it only takes two months of outperformance for those narratives to change. Now investors are hastily checking that they have enough exposure to a reawakening European economy. So much for the US being the exceptional market.

The old and new arguments are both ridiculously overconfident. The idea of US exceptionalism became as exaggerated as the dramatic transformation of sentiment towards Europe.  

Investor feelings and behaviour are overwhelming dominated by short-term performance and the stories we create to justify it; most strongly held investing beliefs can withstand about a quarter of underperformance. This is because we are obsessed with what is happening right now and can’t seem to shake the belief that whatever it is will continue. 

The truth is nobody knows whether the recent upturn in fortunes from European equities represents a new trend; we could just as easily revert to the performance patterns that have defined the past decade and more.

The fact that we cannot see the future means that we should always be diversified, and that means holding assets that even we might have written off ourselves.

Defensive investing

One of the more remarkable features of recent market moves is the performance of the European defence stocks. The current fervour for this area is in stark contract to five years prior when investors seemed incredibly keen to add such names to ESG exclusions lists and remove them from portfolios.

I have no wish to opine on the rights and wrongs of removing defence companies from a portfolio, but the dramatic shift in sentiment is a useful reminder not only that the world changes, but how we feel about the world also develops through time. We are all prone to believe that the things we think and feel presently are unshakeable. This is not true, not only will the environment around us evolve, but our perspectives and opinions are likely to alter with it.

What we staunchly believe now, may be very different in five years’ time for a plethora of reasons. We should always ensure our decision making is not so dogmatic that it fails to reflect this possibility.

The other – perhaps unpalatable – point is that our investment preferences are (like everything else) impacted by returns. Exclusions that are driven by genuine values are not always immune performance pressure.

We still can’t predict catalysts

Amongst strong competition, ‘catalyst’ is one of my least favourite investing words. People spend an inordinate amount of time talking and thinking about catalysts, but in the vast majority of cases all they are doing is trying to predict changes in market sentiment. Which, as you may have guessed by now, I do not believe we can do.

Imagine that last year you had a constructive long-term view on European equities because you felt that they were attractively valued – someone would have inevitably said: “That’s great, but what is the catalyst?”

Would you have said:

“Well, I think Trump will be elected as US President and his actions will shake the global world order, this will leave Europeans doubting the reliability of their most powerful ally, which will lead them to loosen fiscal constraints and improve nominal GDP prospects, and this will provide a major boost to earnings and sentiment.”

This would have been incredible foresight and if anyone did predict this, I missed it when reading through the 2025 outlooks.   

Investors see catalysts everywhere when they look at past performance, but most of the time these are just stories told to explain outcomes. Most developments in financial markets do not have individual catalysts but come about due to a confluence of factors. Even on the occasions where there is an obvious singular catalyst – it is typically only observable after the fact.

Performance always comes first, explanations second.

Didn’t know then, and don’t know now

There have been some surprising developments already this year, which might mean that investors are reining in their attempts to forecast the future. Unfortunately not. One of the most puzzling but inevitable investor reactions to being blindsided by market developments is to immediately start trying to predict what comes next.

We were wrong then, but we will be right now.

The quicker we accept all that we cannot know or foresee, the quicker we can make sensible investment decisions that reflect that frustrating but inevitable reality.

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For investors it seems that being consistently wrong is far more comfortable than being uncertain. So, despite the early months of 2025 giving us yet another valuable lesson in what we shouldn’t be doing, we will no doubt carry on regardless.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).