So, How did they do? On November 30, the S&P 500 closed at 2647.58. This represents a 18.25% price increase. The average of the predictions made were for a 4.05% increase. As Maxwell Smart would say, “Missed it by that much.”.
Making predictions is hard. Below is a list of annual stock market forecasts made by some of the largest investment firms in America. (Source: Bespoke Investment Group). It compares the average forecast to the actual stock market close.
Here are some observations.
1. Many forecasts miss by a significant margin.
The predicted stock market differed, on average, by 13% in absolute terms. The closest forecast happened in 2005. Seven times in 17 years, the difference was more than 10%. The margin of error was less than 5% on 6 occasions.
2. Getting the direction right is a problem.
Not one time in 17 years did these investment banks predict a negative year for the stock market. But four times, the actual results were in the red. Three of those years, the average estimates were for double digit growth. Unfortunately, double digit declines were what really happened.
3. Under promise and over deliver
When the market delivered above average gains, the forecasts were more conservative. In 2009, the consensus prediction was for growth near 20%, and prices increased by 23.5%. Every other year, the “experts” predicted far smaller increases than what really happened.
These large investment firms have staffs dedicated to investment research and analysis. Yet the data shows how difficult making accurate predictions can be.
We all would like to know what is going to happen next year. It would make major decisions about asset allocation much easier. We would also be able to better prepare ourselves for any adversity we may face. But, our crystal ball is cloudy at best.
What next year will bring is anyone’s guess. But our prediction is the forecasts will most likely be off. (Unless of course, they aren’t).