Why “faster and deeper” rate cuts likely wouldn’t lift shares

Overview

Since the beginning of this year, stock market bulls have confidently been predicting two things: firstly, the Reserve Bank of Australia will slash its Overnight Cash Rate (OCR); secondly and consequently, stocks will generate above-average returns.

On 30 June, one prominent bull was “positive on the outlook despite a long list of concerns that are chipping away at confidence ... Outside of a recession, we think Australia can avoid the worst of these drags ... Ultimately, it’s about what the RBA thinks, and we think they have a runway to lower rates faster and more aggressively ... We ... expect at least another 100 basis points of easing. But that would only just put policy settings into easy territory, meaning (that) rates could fall even further than this” ... (underscore in the original).

“A rate-cutting cycle outside of an economic recession,” this bull concluded, “is bullish” (for equities).

In this article, I assess the bulls’ two-fold contention. Considering the variability of returns over the past half-century, it’s not unreasonable to expect that stocks will generate positive CPI-adjusted total returns over the next six and 12 months.

However, given today’s high valuations, it’s more – indeed, most – likely that shares’ short-term CPI-adjusted total returns will be flat.

Bulls ignore a vital preliminary question: why should speculators – that’s what the bulls mostly are – rely so heavily upon the RBA and its possible actions? As I established in Stop obsessing about the RBA (14 February 2025), its short-term impact upon stocks – and of stocks upon it – has usually been scant. Only on the infrequent occasions when it alters its OCR by ca. 100 basis points or more within a given 12-month period does it seem to affect stocks during the next one.

It’s comical: “experts” vainly try to predict something – the actions of the RBA – which seldom affects stocks! Clearly, most investors should usually ignore both the RBA and those who try to prophesy its actions.

My assessment highlights crucial shortcomings of the bulls’ case. Firstly, their attention is misdirected. What’s most important is NOT what the RBA thinks: it’s what the Federal Reserve does. Given their propensity to obsess about central banks, bulls should fixate upon America’s rather than Australia’s. The RBA is formally independent of Parliament and Executive; in practice, however, it’s not independent of the Fed. Quite the contrary: for decades the RBA has reliably followed the Fed’s lead.

The RBA’s policy rate has long been correlated much more strongly to the Fed’s than to macroeconomic conditions in Australia. Accordingly, until the Fed slashes the Federal Funds Rate (FFR) – or unless it really is different this time, as some bulls imply – the RBA can’t slash its OCR.

Secondly, the bulls’ confidence is misplaced. Even if the RBA cuts “faster and deeper” – and independently of the Fed – there’s no historical evidence that its actions will be bullish for Australian equities. There is, however, considerable evidence that they’ll be bearish. The RBA has slashed its OCR only during actual or apprehended slumps – which usually crush equities. Some bulls tacitly acknowledge that they’re depending upon the occurrence of something that’s never happened before: sharp decreases of the RBA’s policy rate outside a recession (or its immediate aftermath).

In this crucial sense the bulls’ confidence has no empirical basis: it’s mere wishful thinking.

If it’s different this time, as they imply, then it’s their obligation to provide a compelling argument and corresponding strong evidence. That’s particularly so given one bull’s advocacy – and seemingly cavalier attitude towards the risks – of low, zero or even negative “real” rates of interest.

Thirdly, bulls ignore the random nature – and hence the unpredictability – of stocks’ short-term returns (for details, see Stop kidding yourself: Nobody can “time the market” 30 June). As a result, if stocks rise materially over the next 6-12 months it needn’t be because bulls have been prescient; it could simply be because they’ve been lucky.

Finally, bulls give too little weight to Australian stocks’ valuations. One of them grudgingly accepts that they’re presently elevated, but nonetheless asserts – without evidence – that this is “not a constraint to the market trading higher, particularly when cyclical tailwinds (which, presumably, means considerably lower OCRs) are building.”

My analysis affirms the polar opposite: high current valuations don’t merely constrain future returns, and they do so especially when the RBA cuts “faster and deeper.” The evidence from the past 35 years – and the risk for the near future – is that sharp cuts of the RBA’s policy rate have been much more likely to depress than to boost shareholders’ returns.

My conclusion is therefore unequivocal: steep cuts of the RBA’s OCR, if they eventuate, would more likely be bearish than bullish for Australian equities.

Whether Stocks Lift as Opposed to Why They Rise

At the outset, it’s vital to make two key points: firstly, over the next 6-12 months the prices of shares could, as likely as not, rise; secondly, regardless of whether they increase, decrease or remain roughly unchanged, it’ll likely be for several or more of any number of possible reasons – most of which are unforeseeable and many of which are unrelated to central banks’ words and deeds.

In Stop kidding yourself: Nobody can “time the market” (30 June) I distinguished what we (1) can know from (2) what we don’t know and (3) can reasonably infer. We know, using the same methods which I described in that article, that the CPI-adjusted, six-month and 12-month total returns of the All Ordinaries Index since January 1975 closely approximate (albeit with “fat tails”) standard normal distributions. We therefore know that these short-term returns are random – and hence unpredictable.

For each month since January 1975, I calculated the All Ordinaries Index’s cyclically-adjusted PE (“CAPE”) ratio, as well as its CPI-adjusted total (that is, including dividends and distributions) subsequent six-month and twelve month returns. I then ranked the data according to CAPE, stratified them into quintiles (five groups with equal, net of rounding, numbers of observations), and computed the mean and standard deviation of each quintile’s six- and 12-month returns. Finally, given that the returns within each quintile are approximately normally distributed, for each quintile I calculated odds of a negative return.

Table 1 summarises the results. As valuations (which the CAPE ratio measure) rise, the probability that markets subsequently generate negative “real” total returns also increases.

We know the means and standard deviations of each quintile of observations. We don’t, however, know what the Index’s CPI-adjusted total return will be six and 12 months from now; that’s because we know that past returns have been – and, we infer, future ones will be – random. Assuming that the six-month return derives from a normal distribution, we don’t know what the Index’s return over the next six and 12 months will be, but we can infer the probabilities that particular returns will occur.

Table 1: CPI-Adjusted Total Returns, All Ordinaries Index, by CAPE Ratio, January 1975-June 2025

On that basis, plus the assumption that subsequent returns derive from a distribution with the same mean and standard distribution, the most likely future return is the mean historical return.

Given the distribution of past returns, assuming that future returns have the same distribution and for the moment ignoring the CAPE ratio (that is, restricting our attention to the bottom row of Table 1), our best guess is that the Index’s CPI-adjusted total return during the six months to December of this year will be 3.9%. There’s also a 95% chance that the return will lie within ± two standard deviations of its mean, i.e., within the range 3.9% ± (2 × 12.4%) = -20.9% to 28.7%.

Hence there’s a 2.5% probability that it will be less than -20.9%, and an equal one that it’ll be greater than 28.7%. The return could soar, plunge or remain unchanged. There’s also a ca. 38% probability that the six-month return will be negative, and a ca. 62% chance that it’ll be positive. And so on for the Index’s return in 12 months’ time.

Bringing the Index’s CAPE ratio (which on 30 June was 21.3) into the analysis significantly alters this relatively sunny outlook.

A ratio of this magnitude lies within the highest quintile (#5) of observations. These observations are also (albeit, given the smaller number of observations less perfectly) normally distributed. Within this quintile, the Index’s subsequent CPI-adjusted, total six-month return averages -0.1% and its standard deviation is 11.2%. It’s therefore reasonable to infer that there’s a 95% chance that the Index’s six-month return in December of this year will lie within the range -0.1% ± (2 × 11.2%) = -22.5% to 22.3%. There’s also a ca. 50% probability that it’ll be negative, and a ca. 50% chance that it’ll be positive.

Hence the first key point: taking today’s CAPE into account, the likelihood that during the next six months the Index rises or falls is equivalent to the toss of a fair coin. That’s a very weak basis for a bullish outlook – which is, I suspect, why bulls typically ignore or denigrate CAPE!

Why will the Index rise – or perhaps fall or remain steady? Who knows? That’s the second key point: whether it rises, falls or remains roughly unchanged, it’ll be for any number of possible reasons. Some of them will surprise the experts, many will have nothing to do with central banks’ words and deeds, and all will be assigned after the fact – and on the questionable basis that because the assigned reason preceded the Index’s change, first event caused the second.

Given the large (relative to its mean) standard deviation in quintile #5 of Table 1, during the next 6-12 months equities could rise. Indeed, even when taking into consideration today’s high valuations, there’s a 32% chance that over the next six months stocks will rise up to 10%, and there’s an 18% chance that they’ll lift 10% or more. And during this interval, perhaps the RBA will cut its policy rate “faster and deeper.”

Clearly, however, the occurrence of these two events wouldn’t constitute evidence that the bulls have been prescient: it’d merely indicate that they’ve been lucky.

What Explains the RBA’s Policy Rate?

Bulls obsess about the rate of change of Australia’s Consumer Price Index (CPI) because it influences the RBA’s OCR. According to one bull, the announcement by the Australian Bureau of Statistics on 24 June of consumer price inflation in May, “which was better than expected at both a headline and core level ... , has provided a green light for the RBA to cut faster and deeper.”

Figure 1 plots the OCR, as well as 12-month percentage changes of the CPI, each month since January 1990. (I’ve used the ABS’s quarterly estimates, and extrapolated them into monthly observations. The RBA’s record of its OCR, file A2, begins in January 1990.)

Figure 1: Australia’s CPI and the RBA’s OCR, Monthly, January 1990-June 2025

Broadly speaking, these data corroborate the bulls’ contention. Decreases of CPI’s 12-month rates of change are associated with decreases of the OCR. Most notably, during the early-1990s CPI’s rate of increase sharply decelerated from more than 10% to less than 0%; over the same interval, OCR plunged from more than 15% to approximately 5%. And from ca. 2008 to 2019, CPI’s rate of increase abated from 6% to less than 0%; during these years, OCR fell from ca. 7.5% to 0%.

Similarly, rises of CPI are associated with increases of OCR. Most notably, COVID-19 and resultant “lockdowns” triggered a tsunami of government expenditure – and a sharp rise of CPI’s rate of growth. In response, the RBA boosted its OCR from 0.1% to 4.35%. Yet the two variables’ correlation is positive (0.33) but weak: the variation of CPI explains just 0.33 × 0.33 = 11% of the variation of the OCR.

In contrast, the policy of the U.S. Federal Reserve seems to influence the OCR much more strongly – indeed, almost five times more strongly – than Australia’s CPI does.

Figure 2: Fed’s Funds Rate and RBA’s Overnight Cash Rate, Monthly, January 1990-June 2025

Figure 2 plots the Fed’s FFR and the RBA’s OCR. The two variables are also positively correlated (0.72). Their relationship is much stronger than the one in Figure 1: the variation of the FFR explains 0.72 × 0.72 = 52% of the variation of the OCR. That presents two key problems for bulls. First, although the RBA’s day-to-day operations are independent of Parliament and Executive, they’re NOT independent of the Fed. Hence a deceleration of the rate of growth of Australia’s CPI doesn’t provide the “green light for the RBA to cut faster and deeper” – a decrease of the FFR does.

As a result – this is the second problem – since 1990 the RBA’s OCR hasn’t strayed too far from the Fed’s FFR. The more it does at one point in time, the more the two rates tend subsequently to converge, i.e., the more closely the OCR gravitates towards the FFR.

The bulls’ difficulties run deeper. It’s reasonable to assume (as opposed to predict), for example, that over the next few years the U.S. Government’s already-massive deficits are more likely to continue – or even rise – rather than abate. Further, President Trump’s tariffs are more likely to boost than to cut American manufacturers’ costs. And if he’s using the threat of tariffs merely as a negotiating tactic, businesses will remain uncertain about the costs that they’ll face and thus become reluctant to undertake the capital expenditure that’s necessary to maintain, never mind expand, production. After all, what’s to prevent America’s re-imposition of tariffs, or the threats of tariffs, at some point in order to try and extract other concessions?

These and other actions could encourage foreigners to “jump the tariff wall” and invest in the U.S.; equally, they could deter foreign investment. The prospect of even bigger budget deficits, higher costs and stagnant or even lower capex is a recipe for a higher, not a lower, CPI – and thus for a higher, not a lower, FFR.

Given that the RBA follows the Fed, President Trump’s actions, actual and possible, hardly provide a “green light” for the RBA to slash its policy rate further below the Fed’s. Nor does America’s current (released by the Bureau of Labor Statistics on 15 July) annualised rate of CPI growth (3.5% when calculated as a compound annual growth rate rather than an arithmetic mean).

Figure 3, which plots the OCR net of the FFR, clarifies this key point. In January 1990, the OCR was 17.25% and the FFR was 8.23%; hence OCR net of FFR was 17.25% - 8.23% = 9.02%, and so on for each month to June 2025. Albeit in a crude sense, the disparity of the two central banks’ policy rates quantifies the relative “tightness” of their policies: if the OCR exceeds the FFR, then the RBA is tighter than the Fed; if, however, the OCR is less than the FFR, then the RBA is looser than the Fed.

Figure 3: RBA’s OCR Net of Fed’s FFR, Monthly, January 1990-June 2025

Over the past 35 years, the OCR has exceeded the FFR by an average of 1.75 percentage points. By this (albeit rough and ready) standard, the RBA’s policy has typically been tighter than the Fed’s. Never was it tighter, relatively speaking, than in the early-1990s. By the turn of the century, however, the disparity between the two policy rates had largely vanished. Over the next ca. 20 years it reappeared: from 2000 to 2019, the RBA’s OCR generally exceeded the Fed’s FFR.

Since ca. 2020, however, the RBA’s policy rate hasn’t merely been lower than the Fed’s: never since 1990 has its policy been looser for longer (see also Tight(er) financial conditions will end the bull market, 24 March).

In effect, bulls aren’t merely contending that this disparity will continue; they’re claiming that it’ll widen. It’s not obvious that it can.

Figure 4: America’s CPI and the Fed’s FFR, Monthly, January 1990-June 2025

As in Australia, so too in the U.S.: just as the RBA’s policy rate is correlated with Australia’s CPI, the FFR is correlated with America’s CPI (Figure 4). The lower is CPI, the lower is FFR; and the higher is CPI, the higher is FFR. The two variables’ correlation is 0.35 – about the same as the corresponding variables’ correlation in Australia.

The Problem with Low, Zero and Negative “Real” Rates of Interest

How far can the Fed slash its FFR relative to America’s CPI? I don’t know and the bulls won’t say, but history provides a rough guide. Figure 5 plots the “real” policy rate in each country since January 1990. In that month, the OCR was 17.25% and over the past 12 months CPI had risen 7.7%; consequently, the “real” OCR was 17.25% - 7.7% = 9.6%.

Figure 5: “Real” Policy Rates, Australia and the U.S., Monthly, January 1990-June 2025

It’s true that the Fed’s FFR is now higher, net of CPI, than at any time during the past 20 years. It’s also true that the “real” policy rate in Australia is among the highest of the past 15-20 years. On that basis, it’s hardly surprising that bulls expect a lower OCR. However, given that the Fed exerts more influence over the RBA than does consumer price inflation in Australia, she’s contending, in effect, that (1) America’s CPI will continue to fall, and consequently that (2) the Fed will slash its FFR.

The expectation of low, zero or even negative CPI-adjusted (“real”) rates of interest is the crux of one bull’s upbeat outlook.

When real rates are low, nominal rates slightly exceed the rate of consumer price inflation; zero real rates prevail when nominal rates equal CPI’s growth; and negative real rates occur when nominal rates are less than CPI’s rise.

This bull contends that in real (CPI-adjusted) terms, the OCR “was zero or negative for 6-7 years before the pandemic, and there was no evidence that this was stimulative. If the neutral rate (i.e., the rate which neither depresses nor boosts the CPI) remains zero or less in real terms ... then the RBA can cut the nominal (OCR) to 2.5% or less – another 125-150bps! That might not fix Australia’s structural growth problems, but it will certainly fire up the domestic equity market and house prices.”

Although she alludes to the drawbacks of low, zero and negative real rates, this bull is much too sanguine about them. In this key sense, our positions have reversed: I’m relatively conservative and mainstream, and she’s aggressive and contrarian.

Over the past decade, a rough consensus has existed among conservative central bankers – an endangered species! – regarding low, zero and negative CPI-adjusted interest rates: they pose significant risks to an economy (see in particular Hervé Hannoun, “Ultra-low or negative interest rates: what they mean for financial stability and growth,” 22 April 2015 and Jan Willem van den End and Marco Hoeberichts, “The curse of persistently low real interest rates,” 25 April 2018; see also the RBA’s undated summary, “Unconventional Monetary Policy”). These risks include the misallocation of resources (“malinvestment”), reduced propensity to save, potential for financial instability, and consequent excessive reliance upon even more profligate fiscal policy.

Given these risks, central banks should regard low, zero and negative “real” rates as policies of last resort.

Such rates can encourage excessive borrowing and lending, which potentially leads to boondoggles – that is, wasteful investments in unproductive projects. When real rates are low, zero or negative, savers receive little or no return – or even a negative return – on their savings. Lacking an incentive to save, they save less – which risks lower consumption in the future.

Low, zero or negative real rates can also boost asset prices. That’s seemingly why bulls are advocating them – or, at least, downplaying their risks.

Such rates thus encourage excessive borrowing and leverage, which can amplify risks and make the financial system more vulnerable to shocks. The lower is the level to which nominal rates of interest fall, the more limited becomes the central bank’s ability to cut its rate further and in order to “stimulate” the economy.

Under these conditions, government spending rises – and because governments are much keener to spend than to tax, budget deficits and debts balloon. If consumer price inflation rises above the central bank’s target in response to this spending, it may be difficult to raise policy rates to without triggering a recession.

Low, zero and especially negative real rates should be - for those who advocate them - policies of last resort. Although they may “stimulate” an economy during a severe recession, significant risks accompany them.

Do Plunging OCRs Boost Stocks’ Returns?

For each month from January 1990 to June 2025, I calculated (1) the All Ordinaries Index’s CAPE ratio, (2) the cumulative change (measured in basis points) of the OCR over the preceding 12 months and (3) the Index’s CPI-adjusted total return over the next 12 months. Finally, I (4) divided the dataset into halves: months whose CAPE ratios are below the median, and those which are above it.

Figure 6 plots these data. Thy flatly contradict today’s bulls’ confident expectations.

It’s true that cuts of 100 basis points or more can boost stocks – but this result occurs almost exclusively when CAPEs are below their median. When stocks’ valuations are high – as they are presently – “faster and deeper rate cuts” have seldom lifted returns. Quite the contrary: usually they’ve produced hefty losses.

Figure 6: Changes of OCR (bp) and the All Ords’ CPI-Adjusted Total Return, January 1990-June 2025

In the bulk of the 12-month periods since January 1990, the OCR’s change has varied between -50 and +25 basis points. Within this cluster of observations, the Index’s returns have varied all over the shop: normally, in other words, the RBA’s actions exert no consistent or systematic effect upon returns.

What about the extremes of the horizontal axis? Do sharp decreases of the OCR during a 12-month period presage higher returns during the next 12 months? Do sharp increases portend lower returns? The answers to these questions are, respectively, “no” and “yes” – and depend upon valuations. When CAPEs are below the median (red rings) the overall relationship is weakly curvilinear; when CAPEs exceed the median (blue dots), it’s more strongly so. Particularly when the OCR is falling, returns in months when CAPE is above-median are lower than months when it’s below-median.

Crucially, only in months whose CAPEs are below their median are decreases of the OCR associated with positive shareholder returns. In months whose CAPEs are above their median – like the present – the greater is the decrease of the OCR during a 12-month period, the more NEGATIVE returns tend to become during the subsequent 12 months.

An inspection of individual observation reveals that the RBA slashes the OCR when economic growth is sharply decelerating or reversing, or because it and investors foresee a strong likelihood of a slowdown or recession. Both of these circumstances tend to prompt stocks to swoon. When valuations are stretched, as they are at present, “faster and deeper” cuts are NOT bullish for Australian equities. Quite the contrary: they’re bearish. Regardless of valuation, equities’ highest returns tend to occur NOT when the RBA slashes the OCR, but when it leaves it unchanged.

Today’s bulls are simply mistaken: a “stand pat” RBA is bullish for Australian equities – and, when valuations are high, an activist one is bearish.

Figure 7: Influence of CAPE and Rate Cuts upon All Ords’ CPI-Adjusted Total Return, January 1990-June 2025

Figure 7 summarises key aspects of Figure 6; it delivers a coup de grâce to the bulls’ confident expectations. Below-median CAPE ratios generate high CPI-adjusted total 12-month returns (5.8%), and under these conditions the RBA’s “faster and deeper” cuts of the OCR boost these returns slightly (to 6.9%).

On the other hand, and regardless of the RBA’s actions, high valuations generate meagre returns (average of 0.2% per year) – and when valuations are high, cuts of 100 basis points or more are associated with hefty losses (average of -8.2%). Memo to today’s bulls: choose carefully what you fervently desire!

Yet Again, “Experts” Are Greatly Surprised They Got It Wrong

One last flimsy pillar underlies the bulls’ case. “Several rate cuts on the way after RBA meets this week,” proclaimed The Australian Financial Review’s headline on 7 July. No cut came on 8 July, despite a strong consensus that one would, but no matter: the AFR’s latest quarterly survey “reveals that borrowing costs have much more to fall this year.”

How seriously should investors take this consensus – and its underlying assumption that “experts” can predict the OCR? In How Experts’ “Systematic Mispredictions” Improve Our Returns (6 August 2024) I analysed survey data compiled by the RBA to demonstrate that

1. Over the decades, economists’ forecasts of CPI and OCR have been so erroneous and variable that they’re unreliable.
2. Forecasts haven’t merely been untrustworthy; they’ve also been biased. In the crucial sense that “runs” of negative and positive errors have persisted in the face of repeatedly confounding reality, forecasts have been overconfident.
3. Over time, predictions haven’t become less inaccurate and undependable. Notably, the rising number of forecasters and forecasts has neither reduced predictions’ variability nor improved their accuracy.
4. “Experts” are unable to foresee – even a few months in advance! – crucial turning points such as sudden and considerable rise of consumer price inflation to 40-year highs in the wake of the COVID-19 panic and crisis.

In short, Australian forecasters of CPI and OCR – and thus stock market bulls – have long been unreliable and overconfident. They’ve often been wrong yet seldom in doubt! Moreover, forecasts have usually been biased, and occasionally vulnerable to severe and even catastrophic failure.

Conclusions and Implications

Four conclusions emerge from my analysis:

1. Nobody – not even the RBA! – can reliably foresee changes of the RBA’s OCR;
2. The short-term impacts of central banks’ unpredictable moves upon stocks are generally (that is, except at extremes) random and at best slight;
3. So too are stocks’ CPI-adjusted six- and 12-month total returns;
4. At extremes – such as when the RBA cuts its OCR by more than, say, 100 basis points during a 12-month period – its impact upon stocks when valuations are high – as they now are – is usually sharply negative.

It’s thus as comical as a dog trying to catch its tail: “experts” are vainly trying to predict something (the actions of the RBA) which they've mostly been unable to predict and in any case seldom affects stocks – whose short-term returns are random and thus also unpredictable!

Unlike speculators, who (unwittingly?) accept poor odds and eventually suffer the consequences, investors act in accordance with favourable probabilities and generally reap the benefits. It’s therefore possible, as bulls expect, that over the next six and 12 months their returns will exceed their historical averages.

Taking into consideration stocks’ stretched valuations (i.e., the All Ords’ high CAPE ratio), however, that’s unlikely.

Similarly, despite experts’ abject inability to predict, it’s possible that over the next 6-12 months (1) the RBA slashes its OCR and (2) stocks’ returns soar. Yet since 1990 that’s been a rare occurrence; hence it’s not merely very unlikely: it’s much more likely that “faster and deeper” cuts crush stocks.

As a result, if over the next 6-12 months the RBA slashes its OCR and stocks rise materially, it won’t be because bulls have been prescient; it’ll be because they’ve beaten the odds, i.e., been lucky.

Given the financial world’s bewildering complexity and inherent messiness, what’s an investor to do? My results reconfirm the wisdom of Leithner & Co’s typical allocation of time and energy: we devote considerable attention to the analysis of and issues related to the companies we own and seek to own – and mostly ignore the RBA, its occasional statements and actions, as well as alleged experts’ incessant but futile attempts to foresee its decisions and their consequences.

Warren Buffett’s advice remains as wise as it is succinct: “if Fed chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years,” he told U.S. News & World Report (20 June 1994), “it wouldn’t change one thing I do.”

Peter Lynch, manager of Fidelity’s Magellan Fund from 1977 to 1990, agreed:

“I don’t worry about any of that (macroeconomic) stuff ... If you spend 13 minutes a year on (macro)economics, you’ve wasted 10 minutes.”

Value investors such as Benjamin Graham, Buffett, Lynch and Leithner & Co seek to buy quality stocks at bargain prices, and hold them indefinitely. For that purpose, short-term changes of macro-economic variables such as GDP, consumer price inflation and unemployment – and the central bank’s policy rate – are usually of little consequence.

As in other aspects of your life, so it is in investing: success doesn’t result from trying to peer into the future and somehow eliminate risk and uncertainty. Still less does it come from heeding “experts” who’ve apparently fooled themselves – and, alas, others – into believing that they possess the ability to foresee events.

They don’t know and they’re just guessing – but if they confessed this truth, who’d pay any attention to them? And if everybody ignored them, who’d want to pay their inflated salaries?

Successful investment isn’t a matter of accurate prediction; instead, it entails the management of risks (which in practice are largely unpredictable) and the acknowledgement of uncertainty (which by definition is unfathomable; see, for example, To lift your returns, swap these risks, 9 December 2024). Never mind today’s bulls and their idle predictions about the RBA and stocks’ returns; instead, emulate successful investors (for details, see Naysayers are wrong: you CAN emulate Warren Buffett, 10 June).

In conclusion, think for yourself: in particular, eschew bulls’ woolly thoughts and hot emotions, and embrace realists’ hard logic and cold numbers. Be patient, avoid overconfidence, don’t obsess about the unpredictable, don’t be fooled by randomness – and the odds are you’ll do fine.

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