Never Listen to Market Forecasts, Especially Mine

Never Listen to Market Forecasts, Especially Mine

By Jack Forehand, CFA, CFP® (@practicalquant) —

You are witnessing the rise of the next great market forecaster. I may not have the Ivy League pedigree. I may not have cut my teeth at Goldman Sachs or Bain Consulting, But I think we can all agree that the results show I have that special quality that allows me to start off every new year by telling you where the market and the economy will be headed.

You don’t believe me? You want proof? Well in that case I will give it to you.

At the beginning of 2022 I released my first annual market forecast. And the results were nothing short of amazing. I predicted losses for the S&P 500 when almost all the major investment banks were predicting gains. I predicted inflation would be well above the Fed target. I predicted volatility would be high. I predicted value would outperform growth. And I hit on all 4. The time has come to recognize that I have that special quality that allows me to see the future. Come join me next week when I launch my macro hedge fund.

Obviously, I am joking about all of that. As anyone who has read my articles over the years knows, I don’t believe that predicting the future of the market or the economy in any given year is something that can be done with any kind of consistency. The entire goal of writing my forecast last year was to prove that point. We just hit a little bump in the road when I was mostly right.

The confidence from my correct calls makes me even more dangerous this year, though, because now I actually think I can do this. Now I think I can succeed where almost everyone else has failed.

So the only logical solution here is to hopefully humble myself this year by giving it another shot. But before I do that, let’s first revisit my predictions from last year to more closely evaluate them.

Here is what I predicted:

[1] The S&P 500 Will Lose 5% in 2022

This was probably my least correct forecast because as of this writing the S&P 500 is down around 20% for the year. But the market is only down one out of every four years, so predicting a loss and getting it right isn’t bad.

Also, look at the 2022 predictions from the major Wall Street Banks for 2022 (from Jonathan Ferro on Twitter).

My prediction for a 5% loss would have put my target at 4527.87, which was closer to the correct value than all the big investment banks except one.

[2] Volatility Will Rise in 2022

My specific prediction here was an average VIX for 2022 above 21 and two S&P 500 corrections in the year of at least 10%. The average for the VIX for the year was over 25 and we got the 2+ corrections so this one was a win. I didn’t set the bar too high here since a VIX of 21 isn’t that high and corrections are part of investing, but I will still take credit here like a good market forecaster should.

[3] Inflation Will Be Higher Than Forecast in 2022

The specific prediction here was that PCE inflation would be 1% higher than the Fed’s beginning of year forecast. We beat that easily so this one is also a win.

[4] Value Stocks Will Beat the Market in 2022

My prediction was that the value ETF AVUV would outperform the S&P 500 by at least 10%. As the chart below shows, this one was also a win. I will just choose to ignore the fact that I thought value would outperform for many years prior to 2022 as well

Now that I have padded my forecasting credentials, on to this year’s predictions.

Here is what I think will happen in 2023:

[1] The S&P 500 Will Be Up Over 15%

This is a non-consensus call since pretty much everyone is bearish right now. Last year I used what is referred to as the inside view to make my prediction (I looked at the facts and made my own forecast). This year I will recognize that I am not likely to successfully do that again so I will use the outside view (I will just look at what happened historically under similar circumstances and predict that).

To do this, I will rely on data from Ben Carlson’s excellent article on what happens after down years in the stock market. As this chart from Ben’s article shows, the market Is only down in consecutive years 9% of the time. He also found that big down years are typically followed by either big up years or big down years. I will play the odds and go for a big up year.

[2] Inflation Will Slow, But Not to the Fed’s Target

The current annual rate of inflation can be misleading because prices a year ago are not a good indication of what is happening today. If you look at something like the 3-month annualized rate, inflation is already down a good amount. And because housing is reported with a lag in CPI it is still contributing positively to inflation, but that will change soon. I will predict the annual increase in headline CPI for 2023 will be below 3.5%.

[3] 30 Year Fixed Mortgage Rates Fall Back to 5%

While I am making predictions, I might as well stray well outside my area of expertise. Mortgage rates have gone up a lot this year. Some of that is the increase in rates overall. Some of that is a significant widening of spreads in the mortgage market. I think both should ease in 2023. The return to sub 3% rates probably isn’t happening for a long time, but I think 5% rates are very possible.

[4] Technology Stocks Will Outperform the Market

This one probably seems crazy coming from a value investor (I still think value is a compelling long-term opportunity, but I made that prediction last year), but there are a few reasons I think this will happen. First, it can be argued that some of the biggest technology stocks, which have the largest weights in the Technology index ETFs are actually value stocks now. They have been coming up on some of our value screens. But in addition to that, many of these businesses are still growing at strong rates and I think one of the side effects of what Elon Musk has done at Twitter is that they will realize they can operate at significantly reduced cost structures, thus boosting earnings and cash flows. And sentiment in tech has gone completely the other way and is really negative right now.  I always like to take the opposite side when things like that happen. So I will predict that XLK will outperform the S&P 500 by at least 10%.

Learning My Lesson – Hopefully

As I said at the beginning of this article, I don’t think market forecasts offer any value. And I think they offer even less when they come from me. But since I got most things right last year, I need to prove that to myself by giving it a try again. I would expect that at the end of next year we can finally put my dream of being a market forecaster to bed once and for all.

Jack Forehand is Co-Founder and President at Validea Capital. He is also a partner at and co-authored “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Jack holds the Chartered Financial Analyst designation from the CFA Institute. Follow him on Twitter at @practicalquant.