Tuesday, December 27, 2016

stock forecasts: bullish and often wrong

Every December as the holidays approach, Wall Street gurus examine the stock market, and nearly all declare that stocks will rise in the forthcoming calendar year.

The forecasts are still coming in for 2017, but preliminary tallies suggest that — no surprise — strategists are bullish, probably mildly so. Through last year, since 2000, the consensus has always been bullish, holding that the market would rise, on average, about 9.5 percent a year, according to calculations by Bespoke Investment Group. In reality, it rose only 3.9 percent a year, on average, in that period.

So the cheery predictions have often been wrong. Does it really matter? After all, the stock market actually rises most of the time.

But here’s the rub: The stock market sometimes falls, and from time to time, it absolutely tanks. Since the start of 2000, the Standard & Poor’s 500-stock index has ended in negative territory in five calendar years (2000, 2001, 2002, 2008 and 2015) and has been virtually flat once (in 2011). But while a handful of individual forecasters have, from time to time, predicted mildly negative years for stocks, the Wall Street consensus in every single year since 2000 has predicted a rising market.

Consider the calamity of 2008. If you had money in stocks that year, you would probably remember. The S.&P. 500 fell 38.5 percent in the course of those 12 months. It would have been very useful to have received advance warning that stocks were about to plummet, but the Wall Street consensus did not ring out an alarm. On the contrary, the forecast for 2008 was unusually bullish, calling for a rise of 11.1 percent. Wall Street missed the mark by 49 percentage points that year.

How bad is the industry’s track record in making predictions? I had assumed that the annual forecasts were essentially worthless — no better than flipping a coin. But Salil Mehta, an independent statistician who has blogged about the topic, tells me I’ve been too kind. The forecasters, as a group, are much worse than that.

“It’s not easy to be as bad as they are,” he said in an interview. “They are much worse than random chance alone would predict.”

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