The Folly of Market Predictions

The Folly of Market Predictions

In the column, “Re-Think What You Thought,” I mentioned less than half of predictions are accurate. This phenomenon has been well documented, yet market predictions continue to abound. I began making market predictions in my newsletter in January of 2016, mostly to poke fun at the whole prediction process, but also to test myself against the experts. How have I done over the years?

The back-drop to my first year making predictions came on the heels of a volatile and difficult 2015. The US experienced a major correction, while Canada was in the grips of a resource driven bear market. Pundits often base predictions on recent trends, and thus had very modest expectations for 2016. My predictions on the other hand, were bold. Firstly, I predicted that most predictions would be wrong. This is my standard first prediction. I also predicted that the markets would return 20-25% in 2016 and that the Canadian market would out-perform the US. This was an un-heard of forecast at the time, with oil and the Canadian market plummeting simultaneously.

By year-end my predictions had proven prescient, with the Canadian market up 20.2% and the US up 12.0%. Those who believed the experts might have sat out this great year. The beginning of 2017 saw the experts once again expressing low expectations of 0-5% gains for the year. Once again my predictions were bold reiterating that most predictions would be wrong, and calling for gains of 15-20%. From a longer-term perspective I also predicted that market returns would revert to their long-term trend of delivering about 10% average annual gains. Between 2000 and 2015 market performance was only half the historical norm, leading many to suggest that 10% returns were no longer achievable.

The 2017 market returns were an awesome 21.8% in the US and a more modest but still respectable 8.3% in Canada. While these gains fell outside my predicted range, they were vastly superior to the expert’s tepid forecasts.

The great market performance of 2017 then drove the pundits towards a more bullish 2018 stance, predicting gains in the range of 7-10% for the US, and 4-5% in Canada.  My crystal ball became very cloudy. I once again predicted that most predictions would be wrong but failed to provide a guideline of how I thought the market would perform, writing “I don’t have a clue,” with the exception of ruling out a dramatic collapse of greater than 12.5%. This was clearly my most cautious prediction of the three years. I also forecast significantly more volatility in 2018 than in 2017.

My synopsis turned out reasonably well, certainly better than pundits and their bullish stance. The US market ended 2018 down 4.4%, somewhat better than the Canadian decline of 8.9%.  Day-to-day volatility was high throughout the year and especially high in December.

What about 2019? In my January 3rd newsletter I wrote that I had trouble getting a read on expert predictions because they were all over the map. Generally the experts tend to flock together giving me a pretty good sense of where they are at. I think the root cause of the “all over the map” predictions was the pre-Christmas market plunge. One quote I recorded was, “The S&P 500 will drop to 2900 (in 2019) from 3000 at the end of this year.” While appearing in an article around New Year’s the prediction must have been made sometime before Christmas, when the writer was positive about the end to 2018 but negative on 2019. The S&P 500 closed 2018 at 2500. There was a 500 point difference between where this expert expected the S&P 500 to close 2018 and where it ended, clearly demonstrating my main point around the folly of market predictions.

My 2019 predictions were again bold.  It’s a broken record but I predicted most predictions will be wrong, for the markets to be up in excess of 12.5% and for the Canadian market to beat the US. It is far too early to claim victory on these but as of the date of writing, we are off to a good start.

The rationale for my prediction process is outlined in the book, which would also be pertinent to commodity marketing. Those who subscribe to my newsletter will receive back issues where you can fact check this brief summary.   Does my record mean that I can confidently make accurate predictions going forward? Absolutely not! I have a reasonable process but short term market direction is unpredictable. Think long-term, and avoid making bold moves based on bold predictions!

During a 35+ year career in agriculture, Herman VanGenderen became an active investor in stocks and real estate. His book “Stocks for Fun and Profit: Adventures of an Amateur Investor is available at internet book sites. Visit his website at www.you1stenterprises.com, or email comments and questions to you1st.stocks@gmail.com.  

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