(Barrons, Tuesday, July 30th, 2019) – Welcome to the wild and crazy world of Wall Street predictions. They are a dime a dozen, and worth even less.
The Federal Reserve will cut the federal funds rate by 50 basis points when its rate-setting committee meets on the last days of July.
But, no! Actually, the Fed will reduce it only 25 basis points.
And while you’re at it, consider this: The Dow Jones Industrial Average is about to embark on a bear market that will eventually see prices fall by 50%.
Hold the presses—in fact, it is about to melt up!
Welcome to the wild and crazy world of Wall Street predictions. They are a dime a dozen, and worth even less. But that doesn’t stop analysts from making them, or us from paying attention to them. You should resist the urge.
Forecasts for 2019
If you had any doubt, consider my review of the 2019 forecasts that newsletter editors made at the beginning of this year. To set the stage for those forecasts, recall that at the end of December, the stock market plunged far enough to send some broad market averages into official bear market territory. Furthermore, after raising its benchmark interest rate in December, the Fed indicated that it would raise rates several more times in 2019 as well.
Read: The Fed’s Coming Rate Cut Could Be a Blunder
Timer Digest, a service that tracks market timers’ performance, surveyed three dozen timers at the beginning of the year, asking them their forecasts for where the Dow would be at mid-year. The average of their forecasts was 24,815 points, representing a gain of 6%. In fact, the Dow’s first-half gain was more than double that: 14%.
Even more revealing, however, is the range of their predictions. One of the bears forecast that the Dow at the end of June would stand at 15,500, while a bullish timer forecast 29,500. The Dow finished June at 26,599.96.
Notice that those forecasts weren’t from just any Tom, Dick or Harry. They came from investment professionals who charge a hefty fee for their advice.
As the Danish physicist Niels Bohr once said: “It is very hard to predict, especially the future.”
Even the Fed chairman gets it wrong
A similar range of forecasts were made about the federal funds rate. After the Fed’s December meeting, for example, none other than Jerome Powell said he expected the Fed to raise rates two more times in 2019. He should have known, of course, since he is the Fed’s chairman. And yet even his forecast has been wrong: Not only has the Fed not raised rates, the expectation now is that it will reduce rates over the remainder of this year.
Needless to say, the interest-rate forecasts of the newsletters I track were, on average, even further off track than Powell was.
You might worry that I am cherry-picking these anecdotes to make analysts look bad. But the fact remains that no one, whether investment-newsletter editors or Wall Street analysts, has consistently been able to predict the markets’ short-term direction.
Read:Jim Grant: The Big Flaw in Ph.D-conomics
Consider a study of year-ahead analyst forecasts that Larry Swedroe, director of research for The BAM Alliance, has conducted each year since 2010. By his count, only 32% of the analyst forecasts that were characterized as “sure things” came true, while 64% were failures. (He classifies the remaining 4% as a “tie.”)
To be sure, predictive success doesn’t automatically translate into beating the market. I could each day predict that the sun would come up the next morning, for example, and though I would have a 100% success rate, I wouldn’t have any increased probability of beating the market.
By the same token, it’s theoretically possible to make money from an incorrect forecast. A prediction at the beginning of this year that the Dow would rise to 30,000 by 2019’s mid-point could be considered wrong. However, it would nevertheless have led us to be invested in equities during a period that is one of the strongest in recent history.
So perhaps the best judge of analysts’ predictive abilities is the percentage of them that beat the market. And, as we all know, the vast majority of them fail to do so. And, of those few that do beat the market in one period, the majority of them fail to do so in the next.
The psychology of predictions
Call me cynical, but I believe that when an analyst makes a prediction, he is less interested in being right than he is in gaining notoriety and new subscribers. Being outrageous and an outlier is therefore a virtue.
Consider what would probably have been the best forecast one could have made about the stock market at the beginning of the year: That over 2019’s first half, the Dow would rise at its historically average rate of about 4% (before dividends). That would have been the statistically responsible prediction, since the stock market’s return in any given year is (like a coin flip) independent of what has come before.
Notice, however, that such a prediction would have gotten no notice. It would have been unexciting and downright boring. The only way to get attention would be to make an outlandish prediction that is so far outside the mainstream as to get attention.
So this is another reason to ignore analyst predictions. To pay them much attention, you’re playing right into their disingenuous motives.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
This article originally appeared on MarketWatch.
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Posted by :
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com