We love predictions. We know they’re usually wrong, but we want them all the same. The media knows this and provides us with an almost unlimited supply, especially when it comes to the holy trinity of weather, sports, and the stock market. We will impatiently wait through the commercials for the 7 day forecast or to see ESPN trot out the next expert telling us which NFL teams are going to be in the Superbowl. And for the last few weeks, the financial media has given us all manner of experts making predictions about what the markets and economy are going to do in 2016. Of course, with last week’s market activity, some of them may be making revisions to their forecasts.
What I find interesting is we don’t remember or care how accurate the experts’ forecasts have been in the past. Six days from now, no one is going back to compare the actual weather with today’s long range forecast. And no one remembers what the gurus on CNBC predicted last year or even 2 months ago.
We do, however, want those forecasts to be bold and precise. Studies have shown that the more precise and confident a person is about their prediction, the more we believe it. We also don’t want boring. Even though we know the accuracy of a long range weather forecast is low, we want to see that snowflake in day 6 of the weather graphic. And though we know they will be wrong, we want to hear from the guru who is sure the Dow is going up 23% in 2016.
“The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith
Financial “Experts” have a terrible track record. Birinyi Associates recently looked at the annual market predictions of 22 Wall Street chief market strategists from 2000 through 2014. They found that, on average, their predictions were 15 percentage points away from each year’s actual return. These strategists would have been just as accurate predicting a 9% return every year, which happens to be the long term stock market average. Of course, they need to justify their Wall Street salary so you won’t see any of them doing this.
OK, so picking where the market is going to be in 12 months is about as likely as winning Powerball. How about something that seems pretty easy, like whether interest rates are going to be higher, lower, or the same 6 months into the future. The Federal Reserve meets 8 times per year and, based on economic conditions, will either raise, lower or leave the Fed Funds Rate as is.
On the face of it, this would seem fairly simple for a professional economist to predict. After all, they have access to the same information as the Fed does and the Fed only has 4 opportunities during that time frame to make adjustments. You would think most economists would be close, if not dead on, with their predictions.
You know I wouldn’t be talking about this if that were true. According to an academic study using 20 years’ data, a group of highly regarded professional economists were no more reliable than a random outcome.
Market forecasts are fun to read; just don’t make them the foundation of your investment strategy.