Prediction Season

Most people have traditions they’ve grown accustomed to this time of year, no matter what holiday you’re celebrating.  Wall Street has a holiday tradition too, and thanks to the internet, mobile, and easy access to data, it takes on more life every year. I’m talking about stock market predictions, and if you browse any financial periodical, you’ll see what I mean.

To say it’s a fruitless exercise is a massive understatement. The Wall Street Journal wrote an article last weekend discussing various predictions for 2015 that never came close to coming true. Huge Wall Street firms are cited, JP Morgan and Bank of America to name a few, along with their quotes from a year ago that were flat out wrong.

But here’s the thing: Despite these misses playing out year after year, you’ll also read in the very same article what big Wall Street firms think will happen in 2016. After telling you how wrong they were, in the next sentence they tell you what will happen 12 months from now. No one ever says the truth, which is: they really don’t know.

Morgan Housel, who writes regularly for The Motley Fool and is a must-follow if you are interested in personal finance, touched on this topic in the past year. In his article, Housel analyzed the data of 22 market strategists across Wall Street. These are the most experienced and educated people, they have the most access, they have the most resources, not to mention they make a lot more money than you do.

Using data from S&P Capital IQ and Birinyi Associates dating back to 2000, Housel found the 22 Wall St forecasters were off by an average of 14.7% per year. He goes on to say that just using the historical market average (9%) every year, you would be off by an average of 14.1%.

Did you catch that? The smartest forecasters on Wall Street did worse than just picking the average return every year. The only difference is you probably paid handsomely for that very bad advice. Sure, if you predict the average, you’re going to look pretty silly sometimes. But no sillier than Wall Street.

The Hulbert Financial Digest recently posted a study of market returns based on the previous years’ returns. In other words, how correlated is next year’s market return based on what happened this year?

The results showed, tracing Dow Jones data back to 1897 (!!!), that the probability the market will rise is between 65-67%, in every single scenario. Let me summarize that prediction: if the market was horrible this year, there’s a two-thirds chance it will go up next year. If the market was great this year, there’s a two-thirds chance it will go up next year.

Early in my career I found that people treated financial advisors a lot like medical doctors. Clients came to you, they explained some facts and some symptoms, and they waited for a thoughtful answer and infallible solution to whatever ailed them. And we were trained as advisors to give them an answer, to diagnose their situation and tell them where we thought things were headed. ‘Clients expect you to have an opinion,’ the training said, so we spouted off about the Fed, GDP, the price of the dollar, and said something like ‘I think it’s a pretty good time to buy.’ Clients love to ask ‘what do you think the market’s going to do,’ because they have been trained they’ll get an answer!

What I learned was clients were asking the wrong questions and we were giving the wrong answers. They want a prediction because that’s what they’ve been trained to expect (and probably been given from other, terrible sources). If we say we don’t know, the client immediately thinks we’re not smart enough or are missing some key piece of data that the guy across the street has. Because their Uncle Bob gave them his prediction, we should too.

The challenge we all face is to educate and re-train, both clients and advisors. If advisors and clients emphasize individual goals and situations and solutions based on those, we all can stop wasting time and effort on long-term market forecasts. The long-term market, as the data suggests, goes up two-thirds of the time. If you were in Vegas on the tables, wouldn’t you play those odds all night long?

You may be asking, ‘so if Wall Street has no idea what’s going to happen, then what should I do?’ If you’re a DIY investor, you should invest according to your time frame, knowing that the market will generally go up over a long time period but can go anywhere in the short-term. If you work with an advisor, do yourself a favor and don’t ask what the market will do next year. Instead, ask how next year will impact your goals and what steps you can take to help fulfill them.

The sooner advisors admit that they genuinely have no idea what the market will do next year, the sooner clients can start to receive some solid advice. But as long as the headlines keep printing, this tradition will unfortunately live on.

In case you’re curious, see for yourself how some of Wall St’s best and brightest did in 2015. The S&P 500 opened this year at 2058, and as of today, 12/23, the S&P closed at 2064. What you’ll notice when you look at all these numbers is a) they were all basically wrong and b) they all just took last year’s number and added a few percentage points. Do you feel good asking them about 2016?

Goldman Sachs’ David Kostin: 2100

Barclay’s Jonathan Gilonna: 2100

Credit Suisse’s Andrew Garthwaite: 2100

Deutsche Bank’s David Bianco: 2150

BTIG’s Dan Greenhaus: 2200

Citi’s Tobias Levkovich: 2200

BAC Merrill Lynch’s Suvita Subramaniam: 2200

UBS’ Julian Emmanuel: 2225

BMO’s Brian Belski: 2250

Morgan Stanley’s Adam Parker: 2275

Oppenheimer’s John Stoltzfus: 2311

Disclaimer: All written content on this site is for information purposes only. Opinions are solely those of Innovate Wealth unless otherwise specified. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.  

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