Despite a horrendous record in forecasting, Wall Street is making bullish predictions for the stock market next year. Ignore them but invest anyway, our columnist says.
If you want to know where the stock market will end up one year from now, I’m sorry — I can’t help with that.
Neither can Wall Street stock market strategists.
The difference is that I don’t try to forecast the stock market’s movements.
Predicting the future is beyond my competence. And it’s not just me. The overwhelming evidence from decades of academic research is that nobody can reliably and accurately forecast what the stock market will do. Short-term forecasts — including predictions of where the market will be one year from now — are a fool’s game.
Yet Wall Street is at it again. Strategists are issuing boatloads of forecasts that purport to reveal precisely where the market will be at the end of the 2021.
These prognosticators are smart people and often have interesting things to say about what has already occurred in the markets and the economy. But as far as predicting the future goes, Wall Street’s record is remarkable for its ineptitude.
I can’t fault anyone for failing to have known in advance exactly how painful and strange 2020 would turn out to be. I didn’t see it either (and if you know of a way of redoing this entire year, please count me in).
But I don’t make forecasts. Wall Street does and it proved, without a shadow of a doubt, that it had no idea of where things were heading.
Consider a few details of the track record of stock market forecasters over the last year, as compiled by Bloomberg.
In December 2019, the median consensus on Wall Street was that the S&P 500 would rise 2.7 percent in the 2020 calendar year. At the moment, that target is too low: On Friday, the market was up almost 15 percent for the year. That’s a forecasting error of more than 12 percentage points — much greater than the estimate of the market’s increase for the entire year.
How bad of a forecast is that? It’s as if you were told that it would snow 2.7 inches just before a blizzard dumped 15 inches on your town.
That would have been bad enough, but when the stock market plummeted in February and March, forecasters wouldn’t leave bad enough alone. In April, the Bloomberg survey showed, forecasters predicted that the S&P 500 wouldn’t rise at all for this calendar year: They said the market would fall about 11 percent. But the market had begun climbing on March 23, the day the Fed intervened to stem panic. The strategists failed to register the change in direction. If you had invested, based on their predictions, you would have missed a great bull market.
Whoops. On Friday, that “corrected” consensus forecast was off by a whopping 26 percentage points.
It would be unfair to highlight the forecasts for this bizarre year if the record in the past had been impressive, but that just isn’t the case.
Such wildly incorrect predictions have been the norm since 2000, I found, after reviewing the median annual stock predictions made by Wall Street analysts each December. Paul Hickey, a co-founder of Bespoke Investment Group, updated data that he compiled last year.
The numbers show that since 2000, the median Wall Street analyst forecast that the S&P 500 would rise 9.5 percent a year, on average. In reality, the annual increase averaged 6 percent a year.
That 3.5 percentage point gap, or spread, is considerable in itself, but a closer look shows that it vastly understates how terrible the invariably bullish forecasts were.
Each December, since 2000, the median forecast never called for a stock market decline over the course of the following calendar year. But the market did fall in six separate years in that period, or about 29 percent of the time. (That’s roughly in line with the long-term stock market average: Vanguard has found that from 1926 through 2019, the stock market fell in 27 percent of calendar years.)
In 2018, for example, the market fell 6.9 percent, though the forecasters said it would rise 7.5 percent, a spread of 14.4 percentage points. In 2002, the forecast called for an increase of 12.5 percent, but stocks fell 23.3 percent, a spread of almost 36 percentage points.
All told, when gaps like that are taken into account, the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points — which was more than double the actual average annual performance of the stock market.
Year after year, these forecasts are about as accurate as those of a weatherman who always calls for balmy sunshine in a city where it rains or snows about 30 percent of the time. Some forecasts!
Mr. Hickey put it politely: “The fact that the average spread between analysts’ forecasts and the actual performance of the market in that year is over 12 percentage points, I think, is pretty damning, in and of itself.” When the strategists are so off target, he added, “What good is the target in the first place?”
I’d say these targets are worthless, and would avoid stock market bets based on “expert” appraisals of where the market is heading day-to-day or even year-to-year.
That may sound grim, yet I, too, remain essentially bullish about the stock market over the long run. Because the market has risen far more frequently than it has fallen, for many decades, I think it is reasonable, if risky, to make long-term bets that it will rise in the future. Underlying that assessment is the assumption that, despite the kinds of tragedies and setbacks we’ve seen this year, the world economy will keep growing and public companies will make profits that will flow into investors’ hands.
That is why I have continued to put money into stocks — as well as bonds — during this time of pandemic, economic dislocation, and social and political struggle. I’m investing, as always, in a well-diversified, low-cost portfolio made up mainly of index funds that reflect the performance of the global financial marketplace.
I’m doing so even though I’m troubled by the vertiginous heights the market has reached lately. I’m not comfortable with current valuations but I’ve given up on timing the market or picking individual sectors or stocks. There will be some bad times with ugly losses ahead, but over the long run, I expect it will be all right.
That’s not much of a forecast, but it’s the best I can do.
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