STRATEGIES
Wall St. Is at It Again, Making
Irrelevant Market Predictions
Optimistic guesses about
the future are not forecasts, our columnist says.
|
Kiersten
Essenpreis |
Dec. 20, 2024
An annual ritual is underway at the major Wall Street investment
houses: predicting exactly where the S&P 500 will finish the next
calendar year.
This mission is
impossible — but that hasn’t stopped teams of well-trained strategists
at august brokerages and investment banks like Goldman Sachs, Bank of
America and Morgan Stanley from focusing their analytical firepower on
forecasting the future.
How wrong can these guesses be? Paul Hickey, a founder of Bespoke
Investment Group, compared the yearly Wall Street predictions and
actual market results starting with the forecast for Dec. 31, 2000.
He found that the Wall Street consensus only ever predicted gains,
every single year, of about 8.8 percent on average. Of course, there
were big losses in some years, as well as larger-than-expected rallies
in others, so the variance between actual annual performance and the
prediction was huge — an average gap of 14.2 percentage points.
Being wrong by that much means that these forecasts weren’t merely
inaccurate. They were completely out of bounds.
The amazing thing, with a record like this, is that the strategists
keep trying. I salute them for having the supreme self-confidence to
stick with it.
I’m sure that I couldn’t predict the future of the stock market,
either, and I wouldn’t want to try. But if someone forced me to do it,
my random guesses would include the possibility that in any given
year, the stock market may fall. In fact, the S&P 500 declined in
seven of the 25 calendar years in Mr. Hickey’s tally.
Yet in that period, the Wall Street consensus never predicted an
annual stock market decline. When I’ve asked strategists about this
privately, they have suggested that the reason for this constant
optimism is that the investment houses that employ them favor a
bullish outlook. Publicly, they tend to say that the positive
predictions are simply the results of their “models” for the markets.
Whatever the reason, a credulous investor expecting gains every year
would have been disappointed: In the 12 months of 2022, for example,
the S&P 500 fell 19.4 percent; in the recession year of 2008, it
plummeted 38.5 percent.
True, those were years when developments like spiking inflation and
the financial crisis rocked the markets in ways that were difficult to
predict, but the forecasts for the last two years failed to reflect
reality, too, in a different way. After the terrible year of 2022, the
strategists became more cautious. For 2023, the experts forecast a
gain of 6.2 percent, but the market rose 24.2 percent. For the current
calendar year, the consensus prediction was that the S&P 500 would
rise only 3 percent, yet by Friday, the stock market was already up
more than 24 percent.
If you had lightened your stock market holdings in response to the
strategists’ predictions since the end of 2022, you would have missed
out on a tremendous rally.
That brings us to 2025. After failing to anticipate the soaring stock
market, the strategists are more optimistic than usual now, predicting
a price gain of 9.6 percent for the next calendar year. That number
doesn’t include dividends, which would lift the total return of the
S&P 500 above 11 percent.
I’d be delighted with that result. But given all those previous
misses, the strategists’ belated optimism gives me no comfort and
little information. I don’t have a crystal ball, but I see plenty of
reasons for both optimism and pessimism about the markets.
The Federal Reserve this
week trimmed interest rates again, by one-quarter point, but it might
slow down now. The economy has
been strong, and some of the incoming Trump administration’s policies
— like its intention to cut taxes and to lighten the regulatory burden
for many companies — are likely to bolster the market.
Others, like much higher tariffs on a variety of countries, and mass
deportations along with immigration restrictions, are far less popular
among corporations and investors, and could disrupt the global
economy. So could political issues like this week’s conflict over
funding the budget.
Where the market, the economy and the country are heading are
critically important questions. But I don’t have good answers.
Instead, I’ve concluded that it would be wise to disregard all current
rose-tinted claims to omniscience, and will continue to invest
cautiously, based on history and long-term probabilities.
In a nutshell, this is my thinking: The stock market has risen over
the long haul, but it has declined frequently and, sometimes, sharply.
High-quality bonds have usually been safer. Trying to get in and out
of the stock and bond markets with perfect timing is a fool’s game.
So for serious investing, use cheap index funds to hold a diversified
mix of stocks and bonds. Keep the money you will need in the next few
years in safe places like insured bank accounts, money market funds
and high-quality, short-term fixed-income securities. Plan on
investing for decades, if you can, and try to ride out the troubles
that will inevitably afflict the markets from time to time.
It’s hard to avoid the annual stock market forecasts. So enjoy them as
the fortunetelling fantasies they have become, and keep them apart
from your real investing life.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the
economy.
A version of
this article appears in print on Dec. 22, 2024, Section BU, Page 3 of the New
York edition with the headline: Reading Wall Street’s Irrelevant Market
Predictions.
© 2024 The
New York Times Company
