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Market Forecasts Could be Hazardous to Your Wealth

Most predictions for the new year are horribly wrong

Market Forecasts May Be Hazardous to Your Wealth

Justin Metz/Getty Images

The safest prediction about 2018 market performance may be that most predictions about 2018 market performance will be wrong.

This is the time of year when market gurus and economists start rolling out their predictions on the stock market and interest rates for the coming year. Not content to stop there, they’ll also tell us which sectors will be hot and which companies we should invest in. Financial media does this, of course, because it sells. We all want to know the future, and these headlines are clickbait. Before you take the bait these experts are dangling, there are a few things to consider.

At the end of 2016, Wall Street strategists surveyed by Bloomberg predicted that the Standard & Poor's 500 index would rise by 4.2 percent and that interest rates would rise from 2.45 percent to 2.79 percent, as measured by the 10-year U.S. Treasury bond, causing bond prices to decline. It would appear those strategists were more than a little off. As of Dec.12, the S&P 500 index is up 19 percent (or roughly 21.2 percent with dividends). The Federal Reserve raised rates, and bond rates declined — which shouldn’t have been the least bit surprising.

Was 2017 just a bad year for gurus? Nope, it was par for the course. According to the Wall Street Journal, strategists as a whole have missed the actual return of the S&P 500 index half the time by more than 9 percent annually, which is the long-run average gain of the index. And they predicted gains during the years the dot-com and real-estate bubbles burst. It would seem that their forecasts were no better than random guesses. Unfortunately, according to research by Salil Mehta, an independent statistician, their forecasts are worse than random. 

As bad as the stock strategists have been, economists’ forecast of interest rates is even worse. While yields on the 10-year Treasury bond have declined since 2010, economists predicted higher rates every year.  Investors who stayed in cash expecting rate increases missed out on good bond returns.

Certainly not all economists are wrong. Gary Shilling predicted the 2008 housing bubble. In fact, he made 12 forecasts for 2008 on such items as stocks, bonds, housing, and commodities, and was right on all 12. Unfortunately, the guru disappointed many investors the following year when he was wrong on all 12 forecasts. 

My advice

It’s not only pointless to follow the experts, but it’s actually dangerous. Moving between stocks and bonds is a basic tactic of market timing, and most research demonstrates that the more we try to time things, the lower our rate of return is.

I admit that it’s an anxious feeling to be unsure about the future when your financial well-being and retirement are at stake, but that’s one of the keys to successful investing. Investing based on expert consensus is merely “following the herd.” Remember that common knowledge is already priced into stock and bond prices.

So get ready for the gurus to tell you what will happen in 2018. Their confidence in past and present predictions can be very compelling and persuasive, especially when they fail to mention their horrendous errors and confidently brag about their few correct forecasts.

No matter how compelling their arguments are, ask yourself a couple of questions:

1. Is their compelling logic common knowledge and thus already priced into the market?

2. If they do know the future of stock and bond returns, shouldn’t they already be among America’s wealthiest people and not out hustling their sage wisdom to others?

My advice is to ignore the gurus. But if you can’t, try a small contrarian bet against consensus estimates.

Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and other publications. His contributions aren't meant to convey specific investment advice.

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