This year has divided the pundits like few other years have, yet there’s one compelling fact that every market forecast missed.
Thousands of financial forecasts for 2019 have now aired as economists, money managers and market commentators share their annual predictions for economic growth and stock market levels.
All of this data creates an excellent opportunity for researchers to examine the accuracy of financial forecasting and there have been dozens of studies from universities, research bodies, and Government departments covering the area. The results are surprising consistent – universally concluding that economic and market predictions are no more accurate than random guesses or simply assuming next year’s results will be the same as this year. Discrediting any market ‘gurus,’ these findings hold true for individuals as well as consensus views.
The simple fact is no forecaster has been found to have any form of significant accuracy.
However, successfully predicting market turning points has always led to fame and sometimes fortunes. The sheer number of forecasts means that someone will always get it right, however successfully repeating a forecast for market turning points has proved an elusive accomplishment.
Roger Babson predicted the stock market crash of 1929 and gained enough fame to become a presidential candidate, but missed the market’s recovery and other fundamental post crash events.
1987’s crash brought Elaine Garzarelli to the limelight when Business Week described her crash prediction as the, “call of the century” and $700 million flowed into her fund. In the seven years that followed, she only outperformed once and was eventually fired in 1994.
More recently Nouriel Roubini became famous for predicting the GFC, and followed up with the prediction that a deep and prolonged recession would ensue. It didn’t, and the Dow Jones was up more than 50% in two years. Marc Faber, Jeremy Grantham, and Abby Joseph Cohen have the highest profile among the current pundits, yet they all have a poor prediction track record.
Given the poor record of market forecasting why does the industry continue to make predictions? The answer is marketing, as predictions are used to grow the brands of institutions and portray their staff as having deep insights. Privately, most of the people making the predictions will admit they have no conviction in their accuracy. But if you are lucky enough to be correct then kudos and additional marketing opportunities follow.
The media has been complacent in highlighting the faults of market predictions as the related stories are both easy to write and popular. However, forecasts can have a detrimental influence on investors as short term predictions shift attention from long term opportunities where most returns are generated.
One of the emerging trends in business is authenticity in marketing – essentially being more honest in communicating with customers. The practice is being adopted by smart companies everywhere including financial services and we have already seen a small reduction in the number of forecasting firms, but don’t expect to see articles like this from the AFR disappear any time soon.
The habit of quoting Warren Buffet has become very popular but this one is hard to resist as a conclusion, “The only value of stock forecasters is to make fortune-tellers look good.”
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