Forecasting Folly
September 26, 2022
“It’s tough to make predictions, especially about the future.” – Yogi Berra
On May 24th, one week before the start of the 2022 hurricane season, the National Oceanic and Atmospheric Administration (NOAA) released its 2022 Atlantic Hurricane Season Outlook, as it does each year. The Atlantic hurricane season runs half the year, from June 1st through November 30th. The peak of activity, and mid-point of the season, is September 10th.
The Outlook began, “NOAA’s outlook for the 2022 Atlantic Hurricane Season Outlook indicates that an above-normal season is most likely, with a possibility the season could be extremely (aka hyper-) active.” NOAA predicted a 65% chance of an above-normal season, a 25% chance of near-normal activity, and just a 10% chance of a below-normal season. The report further laid out the science behind the forecast. The favorable conditions supporting an above-average hurricane season were many: 1.) warmer sea-surface temperatures, 2.) weaker trade winds in the Atlantic hurricane Main Development Region, 3.) weaker vertical wind shear, and 4.) enhanced West African monsoon. The report went on to say, “The odds are highest for La Niña (58%),” which “further increases the likelihood of an above-normal season.”
NOAA’s prediction clearly favored an active season. So, how has it gone? For the first time in eight years there was no major hurricane prior to the halfway point of the season, no named storm prior to June 1st, and the first hurricane of the season formed in September. According to NOAA, by now, we should have had ten named storms, five hurricanes, two of them major. Instead, more than half-way through the season and past the peak of activity, we have had six named storms, three hurricanes, one major. That is roughly 40% below the predictions for the season and more than 25% below averages. Of course, no one will complain about a lighter than normal hurricane season.
Parallels exist between predicting hurricanes based on climate conditions and making investments based on fundamentals. Either can be a humbling experience. While we avoid making investment predictions, we do manage portfolios based on expectations in the market environment. We have utilized strategies where we expected some combination of better risk/reward. But it doesn’t always work as expected, especially as some fundamentals haven’t behaved ‘normally.’ For example, we have witnessed value stocks become historically cheap, only to see them massively under-perform growth and become even cheaper.
Much of the hurricane season remains, and it may be that NOAA’s expectation for an above-average – or even hyper-active – season will come to pass. As with investing, things can appear to be wrong for long stretches before finally being right. The key is to make reasoned judgements, supported by fundamentals, and know that not every decision will work out over every time period. But if we execute well, and exercise patience, a process of positioning toward attractive fundamentals should win over the long-term.
Jeff Buck
