2017 Predictions

We all like to remember our successes and forget our failures, and finance is no different. As investors’ inboxes once again become clogged with annual outlooks from Wall Street’s scribblers, there is little admission of the nearly universal failure to predict what happened this year—even though the things the analysts missed are much more interesting than their forecasts.

There are two big lessons to learn from the mistakes of the year-end crystal-ball gazing. The first is that when everyone agrees that prices can only go in one direction, it is dangerous. The second is more nuanced: We really know an awful lot less about how the economy works than we thought.

Last year almost everyone was bullish about the prospects for the “reflation trade” of higher bond yields, stock prices and the dollar, driven by rising wages and Donald Trump’s tax-cut plans.

A year on and inflation hasn’t materialized, the tax discussion is bogged down in Congress, and almost every analyst was wrong. Benchmark 10-year Treasury yields are down, not up, the dollar is down, not up, and the S&P 500 has delivered more than double the gains of even the most bullish Wall Street prognosticators.

Cynics will look at what happened in the past and wonder why anyone bothers. Predictions have a dire track record, and have been sadly predictable themselves. Treasury yields have been forecast to rise every year for the past decade, according to forecasts collected by Consensus Economics, yet they have gone down more often than not. Even when they went up, the moves were only once anywhere near what was predicted, back in 2009. Forget using a dartboard to plan investments; on average a coin toss would be better.

The same goes for stock prices. Only rarely is the average S&P 500 forecast of strategists anywhere near the actual result. More than half the time since 2000 the miss has been either too high or too low by an amount bigger than the S&P’s 9% long-run annual gain.