On Forecasting and the End of 2020
We were going to close out what’s been a very interesting 2020 by discussing 2021 capital market forecasts. But it would capture the spirit of 2020 (and Twitter) so much more to not delve into forecasts at all, but to simply complain about them. So, inspired by a Jeff Sommer article at the New York Times, here we go:
Forecasting is hard. If you are relying on the very smart people at, say, Goldman Sachs or Blackrock to bestow their omniscience upon you, you are likely to be disappointed at the end of many years if you review their predictions. As Sommer points out at https://www.nytimes.com/2020/12/18/business/stock-market-forecasts-wall-street.html, the December 2019 median Wall Street forecast was that the S&P 500 would rise 2.7% in 2020. With only a few trading days left, the actual number is about a 15% increase.
It would be charitable to point out that in December 2019 nobody could have accurately predicted the path of COVID-19, along with the monetary and fiscal supports provided by central banks and governments. It would also miss the point. 2020 has been an anomaly in many ways, but not with respect to forecasting accuracy.
Understandably, Wall Street forecasts have tended to be bullish. Since 2000, the median Wall Street forecast has projected an annual rise in the S&P 500 of 9.5%. Unfortunately, the S&P 500 has only risen an average of 6% per year since 2000. Moreover, since 2000 the median December forecast has never called for a S&P 500 decline for the ensuing year whereas reality has seen six different years this century in which the S&P 500 fell.
But to play contrarian to Sommer’s contrarian, what is a forecaster supposed to do? The market rises in more years than it falls, so for a given year, we would expect the typical forecaster to predict the S&P to rise, and odds are he (or she) will be correct. Forecasts are informed guesses, so they’re going to be wrong frequently, and sometimes wrong by a wide margin. But we don’t see Vegas closing up shop and giving up on oddsmaking after the Steelers inexplicably crumbled against the Bengals, and so we shouldn’t yet leap from the knowledge that forecasts are limited to the idea that forecasts are useless.
But what should we do? Recognizing that capital market predictions tend to err on the side of bullishness can be helpful, as it can appropriately temper our expectations. Understanding that some areas of the market have valuations that may be a bit stretched, while others may offer relative value, can be a useful guide to portfolio tweaks. But don’t try to put all your eggs in one basket, don’t invest heavily in timing the market—just maintain a well-balanced, diversified portfolio that reflects your risk tolerance, financial goals, and expected monetary needs. Do have a happy and healthy 2021, with hopes that the COVID-19 vaccines rollout will bring life back to normal later next year (and at the risk of making an inaccurate forecast, we believe in this light at the end of the coronavirus tunnel).
Happy New Year!
JMS Capital Group Wealth Services LLC
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An SEC‐registered investment advisor.
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.