CKBlog: The Market

Friday, February 01, 2019

Look Out for Outlooks 2019 Edition

by Steve Haberstroh, Partner

“People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as looking at sheep guts.”—Charlie Munger

Look out, the 2019 Financial Outlooks are out!

Last year, I started a new tradition. Each December, the major investment houses publish their forecast (guess) for where the S&P 500 Index will close one year later. Thankfully, Bloomberg keeps track of this.

When the year ends, I post the results. This exercise is not to throw shade on these professionals. Rather, I cast light on this practice to:

  1. Demonstrate how difficult it is to predict the future even for the best and brightest on Wall Street.
  2. Dissuade investors from trading based on these forecasts.

If the strategists are almost always wrong, perhaps you shouldn’t rely on their predictions when investing your life savings. Just a thought.

Let’s look at where the investment houses predicted the S&P 500 Index would finish in 2018. These guesses, which were made in December 2017, are represented by the blue bars. The green line (x axis) is where the S&P 500 Index price began the year. The red bar is where the S&P 500 Index actually closed one year later on December 31, 2018. Blue = Fiction. Red = Fact. (Source: Bloomberg)

S&P 500 2018 Price Outlooks

Another very poor showing. The S&P 500 Index closed 12.8% below the mean, 12.2% below the median, 19.9% off the highest forecast, and 5.4% below the absolute lowest forecast.

It’s very difficult to successfully predict the future. I’d argue it’s impossible. Whether your expertise is in elections, the weather, or financial markets, if your profession requires you to make predictions, then your profession requires you to be wrong most of the time.

Much of the analysis published by the investment houses can be useful. But please don’t make changes to your 401k based on a strategist’s call for the market on some future date.

Imagine it’s 2035. You are sitting at your retirement party. One of your buddies toasts you and asks, “So Billy, how’d you do it?!”

You respond, “You know.  Back in 2017, some guy at Scotia Bank said the S&P 500 Index would close at 2750 on December 31st, 2018. So I bought more stocks. Couldn’t have done it without him!”

Absurd right?