Are Stock Market Forecasts Worth Reading?

Are Stock Market Forecasts Worth Reading?

November 29, 2015

December and January are popular months for stock market forecasts. But are stock market forecasts reliable? A recent article says they are not.

The article (Barry Ritzholtz, Would you let a mystic manage your investment portfolio? The Washington Post, November 29, 2015, page B1) contains many examples of failed stock market predictions. One study “… looked at the average Standard & Poor’s 500-stock index forecast made by the 22 chief market strategists of the biggest banks and brokerage firms from 2000 to 2014.”

Those forecasts missed the actual stock market performance by an average of 14.6 percentage points per year. From 2000 to 2014, the 22 strategists did not forecast a single down year. “During that period, the NASDAQ crashed 78 percent and the Great Recession sent the major averages down 57 percent. The strategists failed to anticipate any of it.”

Ritzholz says that the “data overwhelmingly show that the skill set of the predictive pundits is no better than a coin toss. The odd person gets these forecasts about the economy and stock markets right each year, but the lack of any sort of consistent winners and losers means that, mathematically, it is a random outcome.”

That is my experience over 20+ years as a financial planner and investment manager; every year, someone gets it right and is then celebrated as a stock market genius. Unfortunately, that stock market genius wasn’t accurate two or more years in a row.

Accurately predicting the market one year is luck, not skill or insight. Old saying: even a stopped clock tells the correct time twice a day.

Part of the problem is that many forecasts are marketing for products offered by the forecasters’ firms. Mutual fund managers and broker dealer economists have a strong incentive to forecast that the market will do well in the future. If clients think that markets won’t do well, they are less likely to invest.

So what can an investor do? The article quotes author James O’Shaughnessy as saying: “Every major academic study proves that ‘we stink at making predictions about the future… What we should be doing is ignoring every single forecast and relying on the historical probability of how markets perform over the long term.”

Historically, well diversified and well managed stock portfolios outperformed bonds and bank accounts over long periods of time. However, past performance is guarantee of future performance. Perhaps stock prices will decline and never go back up. But there is no historical precedent for that in the United States.

My one forecast at this time: There will be a huge increase in forecasts in the coming two months and most will look silly in 12 months.


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