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MCF Insights: Our Bias Shapes our Decisions vs. Reality

By Dave Harris, CEO

I decided to take a minute to write about how I see repeated evidence of our own beliefs / biases formulating our opinions and thereafter our decisions versus what is the actual real data or empirical evidence.   Almost daily when talking with clients, friends and even industry peers, comments and decisions are made that are inconsistent with historical data.  I certainly do not say this with any disrespect, or to make fun of anyone. It is merely an observation and it is amazing to me how we formulate our opinions which then invariably affects our decision-making processes.  This is true not only with financial decisions, but almost all of our decision making – we are humans having emotional processors, that is what makes us special.

Here is a bias that bear’s this truth:

The stock market is not even close to reality with the economy!  It is way too far ahead!

Well, how many times have you either heard that statement, read that statement or even said or feel that statement? 

But – the stock market is NEVER in step with the economy!   What?  That is correct; it is just a random walk.  Let me share:

I had our MCF Investment Department (Peter Bryans) retrieve the historical data of the actual annual real GDP growth verses the SP 500 total return in each calendar year from 1937 to 2019 (82 years).  See the data chart and graph (next two pages) illustrating each year’s economic growth (real GDP) vs. SP 500 return. 

There is absolutely NO correlation during the calendar year of the stock market being in sync with the economy!!!   The correlation is -.04, meaning no correlation!   

Wow, who would have thought?  And that does not make any sense!  

The stock market is a leading indicator.  It is a predictor, not a causation.  So now you know, the data sometimes says different than what common sense or conventional thinking leads you to believe.  

I have written earlier about another most recent popular bias – “U.S. 2020 November Elections Investment Market Observations (7-19-20)” 



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