"Here Come the Forecasters"

"Here Come the Forecasters"

December 08, 2022
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There's a great story about economist Kenneth Arrow when he was a weather officer during WWII. Arrow's team was tasked with producing long-range weather forecasts. Through their study, the researchers concluded that the forecasts were no more accurate than random guessing. But when they voiced their concerns to their superiors, they received the following response:

"The commanding general is well aware that the forecasts are no good. However, he needs them for planning purposes." The general’s perspective offers a great parallel to the investing industry’s annual tradition of providing market forecasts for the year ahead that’s now underway for 2023.


But before we consider the predictions for next year, it might be wise to review how the forecasters have fared this year as a cautionary tale.

Sam Ro, a market commentator, made it easy for us by compiling the 2022 predictions from 14 notable “market experts.” Here's the summary of their predictions: 

The 14 experts' 2022 S&P 500 year-end price predictions ranged from 4,400 to 5,300, with ten of the 14 predicting the market would end the year at 5,000 or higher.

With the S&P hovering around 4,000, these experts are currently 0-for-14 with one month remaining.


Not so good.


Though, as the market rally continues into December, some may be inclined to say, "There's still time."

For those who feel that way, it should be noted that many of these so-called market experts or their respective firms have revised their predictions (some several times) throughout the year rendering their initial year-end estimates moot even if a potential Santa Claus rally ultimately proves them "correct."

Many who offered mid-year revisions cited unexpected developments—such as the war in Ukraine, the Fed, interest rates, or inflation—as the reasons for the change.

In other words, they had no idea what was going to happen. To be fair, not knowing what the future holds is not a failure because nobody does. If we’re honest with ourselves, we don’t know how the rest of our day will pan out, much less the next year.

But forecasters don’t seem to think this is the case. The only way anyone can gather the confidence to offer a prediction is to believe they have some knowledge of the future (an oxymoron) that others don’t have.

Since it’s obvious that knowledge of the future doesn’t exist, then it’s intuitive that no matter how much data or research we consider, there is no way to guarantee an accurate forecast which should tell us all we need to know about the value of forecasting.

But that’s just one opinion, so for good measure, here are what some of history's greatest investors have said about forecasting:

Warren Buffett:

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."

John Templeton:

"In all my 60 years in the stock market, I never found anyone whose opinion of what the stock market would do next week or next month was worth heeding."

Peter Lynch:

"You never can predict the economy. You can't predict the stock market."

In closing, your financial plan is not dependent on your financial advisor, or anyone else, correctly predicting the future. Instead, we believe it’s much more prudent to prepare for a wide variety of possibilities making forecasting entirely unnecessary.

This being the case, we would encourage you to disregard anything the pundits have to offer as this annual forecasting charade continues.

Stay the course.