Excess Returns: Episode 8: Perils of Market Forecasting

We have just completed market prediction season. It’s the time of year where there are countless forecasts about what the economy will do in the new year. Its when experts tell you what interest rates will do for the year. And most of all, its when you see a variety of predictions for where the S&P 500 is heading this year. The experts making these predictions even do you the favor of giving you exact… Read More

Stock Market Forecasts are Mostly Worthless

A recent article in The New York Times suggests ignoring the predictions of Wall Street strategists in favor of investing in cheap, diversified index funds. “Strategists, some of whom are very smart, are issuing precise predictions for where the market will be in 12 months and they look authoritative,” the article says, adding, “The record shows that they are not as rock-solid as they appear. In fact, many Wall Street strategists are flagrantly inaccurate.” While… Read More

The Perils of Market Forecasting

By Jack Forehand (@practicalquant) — It’s that time of year again. The time of year where all the market experts make their 2020 predictions. You will see countless forecasts about what the economy will do in 2020. You will see many experts tell you what interest rates will do next year. And most of all, you will see a variety of predictions for where the S&P 500 is heading this year. The experts making these… Read More

Forecasters are Usually Wrong, But Foxes Are Better At It

A provocative article in The Atlantic highlights the unsuccessful track record of “expert” forecasters, regardless of their area of specialty or level of experience. However, the article points out that those not invested in a single discipline but rather who integrate “apparently contradictory worldviews” are more successful at predicting outcomes. The article shares findings of a 20-year study conducted in the 1980s by psychologist Philip Tetlock that analyzed over 82,000 predictions from 284 “highly educated… Read More

Economic Forecasters Keep Getting It Wrong

Despite the word on the street, we’re not in an economic boom. This according to a recent article in The New York Times. “The economy has been mired in an extended funk since the financial crisis ended in 2010. G.D.P growth still has not reached 3 percent in any year, and 3 percent isn’t a very high bar,” writes columnist David Leonhardt. He offers data showing that the economy keeps performing more poorly than experts… Read More

10 Forecasting Guidelines

A recent article in CFA Institute provides a list of ten guidelines to use when making economic forecasts: Data matters: “Always base your forecasts on data, not qualitative arguments.” Data-mining can present an alluring trap, the article says, so “torture the data until it confesses, but don’t frame the data to the story.” Don’t make extreme forecasts: “Remember that there are only two kinds of forecasts: Lucky and wrong.” Reversion to the mean: Extremes, the… Read More

2019 Predictions Will Miss the Mark, or Worse

A Bloomberg article by columnist Barry Ritholtz notes that this is the time of year when prognostications surface from strategists and analysts but asserts that they are, “for the most part, exercises in futility.” “The problem with forecasts goes beyond their mere lack of accuracy,” he declares, adding, “My critique is with the underlying cognitive and philosophical failing that are associated with the entire forecasting industry: a lack of humility, the assumption of a skill… Read More

Beware of Expert Forecasts

A recent CFA Institute article argues that “not even the most credible forecasters can time the market profitably with any consistency,” noting that celebrated economists and market pundits are fallible when it comes to predicting what the market will do. “No academic—not [Robert] Shiller, not Nouriel Roubini—no mainstream talking head Jim Cramer type, or Wall Street strategist can do it,” writes CFA Mark Armbruster, president of Armbruster Capital Management. He cites indicators like the CAPE… Read More

The 40% Rule in Forecasting

 A recent article in The Wall Street Journal discusses the 40% rule, which it describes as “a favorite forecasting tactic of Wall Street analysts and other prognosticators trying to make a bold call without being too bold.” The article offers comments by Peter Tchir, a market strategist at Academy Securities, who explains that a 40% forecast means you never have to say you were wrong. “Get it right and you can say ‘see, I was… Read More

Focus on Fundamentals Rather than “Expert” Forecasts

By John Reese (@guruinvestor) —  American philosopher and educator Nicholas Murray Butler once said, ” An expert is one who knows more and more about less and less until he knows absolutely everything about nothing.” His words, both wise and timeless, could apply to “expert” market forecasters. Butler (1862-1947) was president of both Columbia University and the Carnegie Endowment for International Peace, as well as a recipient of the Nobel Peace Prize–distinctions which would make… Read More