“Those who have knowledge, do not predict. Those who predict, do not have knowledge.”
- Lao Tzu, 6th-century Chinese philosopher
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
- Warren Buffett, 20th and 21st-century investor
You have probably received a dozen articles on 2019 predictions. It’s that time of the year when investment strategists all over the world perform their annual ritual of predicting where the markets will go in in the upcoming year. They put on their thinking caps and evaluate everything from the global economy, political instability to interest rates. Full of confidence and bravado, they predict what stocks to buy, year-end targets for market indices, and when the markets will tank.
Memories are short and there is naturally little mention of the nearly universal failure to predict with any precision. Their forecasts and clairvoyance are, for the most part, exercises in futility. Predicting the future of the stock market does not seem to be a strong suit of the investment world.
We looked back at predictions made a year ago for the S&P 500.
In 2018, the S&P 500 returned -4.38%, including dividends, closing out at 2,506.
Of the Wall Street bigwigs, JP Morgan and Credit Suisse were two of the more bullish banks and forecasted the S&P 500 to end the year at 3,000. They were only off by about 20%. Morgan Stanley was the least far off but had predicted a gain of 2-3%, so they still missed the target by over 6%.
2017 was no different - not a single strategist at the top banks saw the S&P 500 Index rising as much as it did. The average gain predicted was 5.5%, versus the actual gain of over 21%.
Isn’t it strange that we never see anyone refer to their prior forecast at the end of the year? Despite all the effort they put into making and promoting it?
A caveat to this statement: In the rare case that the forecaster is accurate (or even just closest), we will hear it paraded in the news for weeks as he or she goes around town, chest pumped, spitting forecasts of the future.
Most of the time, strategists at investment houses will forecast high single-digit returns for the S&P 500, even though the index has fallen outside of the range of most forecasts almost all years. Historically, the US stock market has indeed averaged high single-digit annual returns over decades, so these forecasts do make sense but are clearly meaningless on shorter time horizons.
Most years, returns are not near to the long-term average. Though the long-term average is a good indicator of what to expect in the long-run, few single years fall anywhere close.
Career risk also stops the investment gurus from making outlandish forecasts (this is not the case in the Bitcoin world for example, where it was predicted by some to hit US$100,000 in 2018).
Central banks surprisingly do no better in their forecasts. A Brussels economic think-tank Bruegel has shown that ECB forecasts for inflation and unemployment rates have proven to be systemically incorrect over the past 5 years. Core inflation has remained broadly stable at 1%, despite their prediction of increases since December 2013, when these forecasts were made publicly available for the first time. Other central banks have made similar erroneous forecasts.
It’s safe to say that short-term predictions are fairly worthless, and paying attention to forecasts is a wasted effort. As economist John Galbraith once put it:
“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
With a healthy dose of humility, we need to admit that we all have little clue of where the markets will go over the next year.
Historical data provides a good understanding of the behaviour of asset classes over the long-term. Global equities, for example, have produced a real return of around 7%. But any near-term price movements of 1, 5, or even 10 years are merely noise for the long-term investor. If you believe in the long-term economic progress of the world, then you should own the market through ups and downs, and ignore the noise, or any ‘gurus’ who claim to offer psychic advice.
Just for fun, here is a summary of market forecasts for 2019: