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The Market is Unpredictable

In a sense, financial commentators are a lot like meteorologists; they often make false predictions, yet people still go back for what they have to say next.

Even with all the modern technologies these disciplines deploy in their predictive models, it is clearly still difficult to accurately forecast the future.

Fortunately for meteorologists, human psychology and government regulation do not play a role in what mother nature decides to unleash on the world. Contrast this with market forecasting where even with historical data and trends, it is sometimes still difficult to predict how the invisible hand will influence human behavior.

Here are a few examples of when the market went against the predictive sentiment.

Tobacco Companies

Since it was first published in the 1960s that lung cancer and other respiratory issues were correlated with smoking cigarettes, assumptions were made that the tobacco companies were on their way out.

This sentiment was strengthened in 1970 when President Nixon signed into law the Public Health Cigarette Smoking Act that banned tobacco companies from advertising cigarettes and other tobacco companies on the radio and television.

While smoking cigarettes is still legal, the number of smokers has steadily declined over the years as this law and others have tried to curb the public’s consumption.

A declining customer base would lead one to believe the same would be true for the industry’s stock prices. However, the opposite turned out to be true.

From 1968 to 2017, Altria Group, the producer of Marlboro and other tobacco brands, averaged an annual return of 20%, making it the best performing stock in that timespan. Compare this with the S&P 500 that historically returns around 10% each year.

Due to regulation and a changing consumer base, tobacco companies have been forced to diversify and improve efficiencies to survive. In doing so, they have provided a nice return for investors.

Today, Altria and competitors like British American Tobacco and Philip Morris International continue to attract investors with steady returns and high dividend yields.

Lumber to the Moon

The lumber industry has received quite a bit of unexpected attention in recent months as lumber prices skyrocketed from a low of around $260 per thousand board feet in March of 2020 to over $1650 a little over a year later.

Before the Covid-19 outbreak, lumber supply had been decimated by disease and some other factors. Once the outbreak began, demand expectations plummeted as nobody in the market expected people would be building or renovating during the lockdowns. Prices fell in March with the rest of the market and everyone believed the short supply would be alright.

As it turned out, low-interest rates, remote working, and stimulus checks from the government caused demand to jump for new home construction and renovations in the last year.

The combination of short supply and increased demand from construction caused the price of lumber to make this incredible run.

Fortunately, prices have begun to fall back down in recent weeks as mills ramp up production and distribution channels have filled up.

This is a great example of market expectations diverging from reality and how government intrusion impacts the economy.

Will Oil Follow Tobacco?

We may only be in the beginning stages of this move, but some investors are predicting that oil companies may have a similar fate as tobacco companies of the past.

As tobacco products went out of favor with the government and many consumers, tobacco stocks went on to continuously outperform the market for decades. Could the same fate occur for oil and other fossil fuel company stocks as the world drifts towards “green energy”?

Future demand expectations for fossil fuels have gone down so the industry has seen a large decline in capital investment. Many banks and other sources of funding have dried up as they turn their attention towards wind and solar investments.

The lower demand expectations and a decrease in the production of oil and gas have already led to recent increases in gas prices. If these trends continue, we will likely see higher oil and gas prices in the future.

Whether all of this will translate to greater returns for the industry’s stock prices is yet to be seen. But if the history of out-of-favor industries is any clue, there may still be money to make for investors in fossil fuels.

The Future Remains Unpredictable

While the future remains as uncertain as predicting stock prices and the weather, there are two key ideas to take away from these examples to keep in mind for future investing.

First, do not shove aside companies or industries just because they have been outcasted by the government or mainstream thought. It happened to tobacco and the tobacco stocks soared. It could happen to other industries in the future, like maybe oil!

Second and last, do not underestimate the government’s ability to disrupt the natural laws of supply and demand. Had the government not begun regulating tobacco companies, who knows where the stock prices would be today. And had the government not shut down the economy and handed out stimulus checks like candy, we may not have seen the dramatic spike in lumber prices.