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People always ask what we think the stock market will do in the upcoming year. The true answer—”We have no idea”—is not exciting. But making accurate predictions about something so complex isn’t easy.  Here is an article written by CNBC on January 3rd of this year. The title reads as follows.

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“Despite Trump Euphoria, Wall Street’s 2017 Forecast is the Most Bearish Annual Outlook in 12 Years.”

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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.”.

 

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Predictions are Hard…

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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.

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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.

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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).

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