It’s that time of the year again when the economists and other financial professionals offer their forecasts for the coming year. The forecasts range from the direction of interest rates to how fast (or slow) the economy will grow to where the stock and bond markets are headed. You can even bet on many of these factors at such sites as Kalshi and Polymarket.
An amusing but often overlooked fact about these forecasts is how far off base they can be. An example of this occurred several years back. Stock market returns were strong in 2021. The S&P 500 returned 20 percent, double the long-term average. Many foreign markets also did well and investors approached 2022 with optimism.
As the year 2021 came to a close, the financial news giant Bloomberg surveyed 14 major financial firms on where the S&P 500 would end up at the end of 2022. All 14 firms predicted positive returns. The actual result: S&P 500 ended the year down 18 percent! Those 14 firms represent some of the biggest of the big firms and they hire the brightest of the bright graduates. Yet none of the forecasts came close to being accurate.
You might think these folks would get out of the forecasting business, if nothing less, just to avoid the embarrassment of being wrong. Instead, they carry on like an eternal optimist that they will eventually get it right!
Instead of looking at just one bad year of results, let’s look at the last four years, from 2021 through 2024. Again, Bloomberg recorded predictions of 13 major firms over the period for the S&P 500. When compared against actual results, the most accurate forecaster averaged being off by 18.6 percent per year! Many of the individual yearly predictions were well over 20 percent off the mark!
It’s amazing that we can land people on the moon with math calculations that are deadly accurate. But stock market forecasts should probably come with a warning: “Here’s our best estimate, give or take 100 percent?”
Your takeaway here: don’t react to market predictions to make adjustments to your portfolio. Historically, most of them are off anyway. On any given day, you can find an analyst predicting the market is on the verge of collapse. You can also find one telling how rosy the future looks for stocks. Do you zig or zag? Adjust up or down? Buy more or sell out? How about ignoring both forecasts and sticking to a steady plan of a diversified portfolio that allows you to sleep well at night.
By the way, since we’re at year end, want to know what the big boys are predicting for next year? Well, forget it! I’m not going to tell you. If history is any guide, they’re likely to be wrong anyway!