Every December, major Wall Street investment banks predict the performance of major stockmarket indices over the next 12 months. Pay no attention. As James Mackintosh points out in the FT, the market forecasters are no good at forecasting.
Bloomberg data show that, since 2000, the average prediction a year ahead has turned out to be wrong by more than 10%. That’s almost the same percentage as the average annual market move. Most strategists are bullish, and just tend to assume further gains after a good year.
This year, for instance, a poll in Barron’s shows that the average forecast for 2013 is a 10% gain in the level of the S&P 500 index, with Bank of America Merrill Lynch and Citigroup the most bullish major names. They expect a 13% rise from current levels.
Similar kneejerk bullishness applies to FTSE 100 forecasts. At least 62% of strategists see the blue-chip index reaching 6,000-6,500 by the end of December 2013. Another 14% have pencilled in levels of 6,500-7,000 by the end of December.
It’s also worth remembering that what the market does over one year is largely a question of chance, says Mackintosh. The “extreme variations” of 12-month returns throughout market history show how unpredictable a year’s performance is.
In any case, it’s the index performance over the long term that counts, and the best predictor of that is whether the market is cheap when you buy it. One year’s performance and the bank forecasts that accompany it are just noise.