Beware of Experts Bearing Forecasts

Beware of Experts Bearing Forecasts

Tis the season. Holiday cheer, New Year’s resolutions, and 2019 market outlooks! My New Year’s resolution is to skip the market outlooks this year—and hopefully every year thereafter. Outlooks are mostly meaningless and a waste of time.

Why do I take such issue with market outlooks? First, they overload my inbox. Everyone produces them; asset managers, broker-dealers, registered investment advisors. I get outlooks from firms I’ve never heard of. Second, it’s common knowledge that forecasts are typically wrong. As proof, consider these excerpts from a recent blog post by Joachim Klement, CFA on the Enterprising Investor blog: Analyst Forecasts: Lessons in Futility.

  • For the S&P 500, the median forecast price at the end of 2018 was 2950 points, for a 2018 calendar year return of 10.3%.
  • In Europe, the situation is comparably awful. Strategists expected a 1.5% annual return for the FTSE 100 at the beginning of the year.
  • Strategist forecasts for the S&P 500 have been off by more than 10 percentage points in 13 of the last 20 years!
  • For the S&P 500, strategists got the direction wrong in 11 of the last 20 years. They were right only 9 times out of 20.

Unfortunately, a dismal track record hasn’t stopped forecasters from forecasting. They are paid to forecast, not to be right. I would surmise that most investors don’t remember these predictions or keep any record of them to review. I decided to do just that when I read this Star Tribune article on December 30, 2017: Local financial analysts predict a strong year in the markets.

The article begins by reviewing what the “experts” predicted for 2017 and then covers other topics designed to grab the reader’s attention. You’ll find industry buzz-words like “black swan” and “bubble.” The climax and conclusion of the article are predictions for where the S&P 500 will end 2018.

The S&P closed the year at 2506—a return of –6.24% (price return). Let’s look at how the “experts” faired.

AnalystFirmPredictionExpected
Return
Carol SchliefAbbot Downing27854.2%
Todd HedtkeAllianz28506.6%
Mark HennemanMairs & Power27001.0%
Roger SitSit Investments29008.5%
David JoyAmeriprise28707.4%
Beth LillyCrocus Hill Partners28004.8%
Craig JohnsonPiper Jaffray28506.6%
Jim PaulsenLeuthold2450-8.3%
Lisa EricksonU.S. Bank28255.7%

Jim Paulson was the only individual who predicted that the S&P 500 would decline. Furthermore, his prediction of 2450 was within a mere 50 points. Below is Paulsen’s comment from the article.

I’ll go with 2450 to win this year. I’m not saying it can’t go up from here, it probably will a little bit, but I just think we’re going to have a pretty good sell-off this year at some point. Not a bear market, buy a good punch in the gut that scares the living daylights out of all of us, a lot of recession forecasts and then it will be a whale of buying opportunity. And I think it will be driven by moving inflation and rate structures above 3 percent.

The comment reminds me of the saying that “a broken watch is certain to be right twice a day.” The market did move higher—at it’s high in September the S&P 500 Index was up almost ten percent. It did deliver a punch in the gut, at one point nearly reaching bear market status (down 20% from it’s high). Most notable, inflation and rate structures above 3 percent were not the drivers.

The reality is that this exercise serves as more of a marketing tool. Investors are better-served focusing on the long-term compounding effects the market can offer. With that said, I leave you with my 2019 predictions:

  • A 70% probably the S&P 500 is positive and a 30% probability it is negative.
    • The index has been positive 14 of the last 16 years.1
    • Over the long-term, the S&P 500 has been up 39 of the last 50 years.1
  • The S&P 500 likely won’t deliver a return close to its long-term average of ten percent.
    • Since 1926, the index has delivered a return that is between 7 percent and 13 percent only 15 times.2
  • The market will test your resolve during the year. A history of market declines reveals the following:
    • 5 percent (or more) declines happen about 3 times a year.3
    • 10 percent (or more) declines happen about once a year.3
    • 15 percent (or more) declines happen about once every three years.3
    • 20 percent (or more) declines happen about once every six years.3

Happy Investing

  1. Source: AMG Funds
  2. Data from YCharts
  3. Source: American Funds
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