Streetwise for Sunday, December 27, 2020

This is my last column for 2020, therefore as we look forward to what I hope will be a brighter 2021 with less of a COVID-19 problem, I would like to answer that most often asked question, “What will the markets do in the coming year?”

Let me answer that by using the same thought penned by Jeff Sommer, a Wall Street columnist with the New York Times, which mirrors mine.

Predicting the future is beyond my competence. Furthermore, the overwhelming evidence from decades of academic research is that nobody can reliably and accurately forecast what the stock market will do. Short-term forecasts - including predictions of where the market will be one year from now - are a fool's game.

So, what about Wall Street’s forecasts. Wall Street has shown, without a shadow of a doubt, that it has no real clue as to where things are heading. Consider a few details of the track record of stock market forecasters over the last year, as compiled by Bloomberg.

In December 2019, the median consensus on Wall Street was that the S&P 500 would rise 2.7 percent in the 2020 calendar year. Recently, the S&P 500 index was up over 13% percent for the year. That is a forecasting error of more than 10%.

How bad of a forecast is that? It is as if you were told that it would snow 2.7 inches just before a blizzard dumped 10 inches on you.

That would have been bad enough, but when the stock market plummeted in February and March, forecasters would not leave bad enough alone.

In April, the Bloomberg survey showed, forecasters predicted that the S&P 500 would not rise at all for this calendar year: They said it would fall about 11 percent.

Yet, the market began climbing on March 23, the day the Fed intervened to stem panic. The strategists failed to register the change in direction. If you had invested, based on their predictions, you would have missed a great bull market.

Whoops. Recently, that "corrected" consensus forecast was off by a whopping 21%.

Yet Wall Street is at it again. Strategists are issuing boatloads of forecasts that purport to reveal precisely where the market will be at the end of the 2021.

These prognosticators are smart people and often have interesting things to say about what has already occurred in the markets and the economy.

But as far as predicting the future goes, Wall Street's record is remarkable for its ineptitude.

Paul Hickey, a co-founder of Bespoke Investment Group, updated data that he compiled last year.

The numbers show that since 2000, the median Wall Street analyst forecast that the S&P 500 would rise 9.5% a year, on average. The annual increase averaged 6 percent a year. That 3.5% gap, or spread, is considerable, but a closer look shows that it vastly understates how terrible the invariably bullish forecasts were.

Each December, since 2000, the median forecast never called for a stock market decline over the course of the following calendar year. But the market did fall in six separate years in that period, or about 29%. (That's roughly in line with the long-term stock market average: Vanguard has found that from 1926 through 2019, the stock market fell 27% during those calendar years.)

In 2018, for example, the market fell 6.9 percent, though the forecasters said it would rise 7.5 percent, a spread of 14.4 percentage points. In 2002, the forecast called for an increase of 12.5 percent, but stocks fell 23.3 percent, a spread of almost 36 percentage points.

All told, when gaps like that are considered, the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9% - which was more than double the actual average annual performance of the stock market.

Year after year, these forecasts are about as accurate as those of a weatherman who always calls for balmy sunshine in a city where it rains or snows about 30 percent of the time. Some forecasts!

Mr. Hickey put it politely: "The fact that the average spread between analysts' forecasts and the actual performance of the market in that year is over 12 percentage points, I think, is pretty damning, in and of itself." When the strategists are so off target, he added, "What good is the target in the first place?"

To all my readers, enjoy the holiday season but please stay safe.

Lauren Rudd is a Financial Advisor with Raymond James & Associates, Inc., member New York Stock Exchange/SIPC, located at 1950 Ringling Blvd #401 Sarasota, FL 34236. You can contact him at 941-706- 3449. This market commentary is provided for information purposes only and does not constitute a recommendation.

Opinions are those of the author and not necessarily those of Raymond James. Information has been obtained from sources considered to be reliable, but Raymond James does not guarantee the material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past Performance does not guarantee future results.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.