Every December, stockmarket analysts and economists produce their forecasts for the year ahead. Pay no attention. “Professional market forecasters are often called dart-throwing chimps,” says Morgan Housel of MotleyFool.com. “This might be an insult to chimps.”
Housel examined the average S&P 500 year-end forecast made by the 22 chief market strategists of the biggest banks between 2000 and 2014. The forecasts were wrong by a jaw-dropping average
of 14.6 percentage points a year.
In that entire time, the average forecasts didn’t foresee a single negative year, even though the span included a 78% crash in the Nasdaq and a 57% market slide in 2008/2009. The strategists not only totally missed bear markets, but also tended to underestimate bull runs in good years. “Who pays these people?”
And lest you think macroeconomists are any better, says Economist.com’s Buttonwood blog, the European Commission, the International Monetary Fund (IMF) and the governors of the US Federal Reserve all failed to foresee the 2008/2009 crisis. The IMF, for example, in October 2007 said it anticipated GDP growth of 2.5% in the eurozone in 2008 and 1.9% for America. Similarly, analysts missed the 2014 oil-price slide.
Analysts play it safe. They base their forecasts on the recent past and cluster together: if everybody else gets it wrong too, you won’t be sacked. They also tend to be optimistic because forecasting is largely about marketing, and being too bearish would repel investors. The upshot? While valuations are a good guide to long-term movements, basing decisions on analysts’ short-term forecasts is pointless. All we know for sure about the stockmarket over one year, as JP Morgan joked, is that “it will fluctuate”.