The Problem with Predictions...

A Bullish Call

Wall Street's Seers Forecast More Gains for Stocks Next Year.

Indeed, the dozen seers we've surveyed all have penciled in higher stock prices (for next year), although their estimated gains vary widely, from 3% to 18%. On average, the group sees the Standard & Poor's 500 … about 10% higher

-Barron’s Magazine

 December 17, 2007


Wall Street analysts missed it in 2008.  By about 47%.

It’s that time of year again.  The time when investment gurus from big investment firms such as Goldman Sachs, JP Morgan, Merrill Lynch, Bank of America, etc., make predictions about the coming year.  Allow me to save you some time.  They’re optimistic.  They’re always optimistic.

Every. Single. Year. Since 2000, the consensus of Wall Street analysts has been bullish.  The average return for stocks predicted by Wall Street firms was 9.5% each year according to research done by Bespoke Investment Group as reported by the New York Times.   Not once has the consensus predicted a down-market, even though there have been five such instances over that time frame for the S&P500.  

Salil Mehta is an independent statistician who was formerly the director of research and analytics for the United States Treasury’s Troubled Asset Relief Program and for the federal Pension Benefit Guaranty Corporation.  Mehta studied the public forecasts of Wall Street firms going back to 2000, 186 in total.  92% of the forecasts called for positive year in the market.  Only 8% called for a negative year. 

The worst three years in terms of market performance over the past 18 years were 2001, 2002, and 2008, with returns of -12%, -22%, -37% respectively.  Collectively, there were 23 forecasts released from the Wall Street firms during those three years.  Not one of the 23 forecasts called a negative year.  The forecasters were 0 for 23 on the direction of the market, let alone the actual performance!

So, in summary, be careful what you read about market forecasts for 2018.  No one knows what 2018 holds; just like no one forecast the bursting of the dot-com bubble in 2000 or the mortgage crisis in 2008.  In light of that, we maintain that the best investment strategy for 2018 is to remain diversified, focus on yield rather than growth, and react to changing conditions as the market dictates. 

We remain cautiously optimistic, but fear that much of the good news about the economy is already baked into the recent runup in prices.  At some point, news of the tax reform will subside and investors will look for the next market catalyst.  Perhaps they will find one, perhaps not.  Either way, my personal forecast for 2018 will likely be no better than the large Wall Street firms.  And I’d rather not be wrong in writing.