Forecasting The Stock Market Is More Art Than Science

With the new year finally upon us, you’ll no doubt find prognosticators everywhere try to tell you what they think is going to happen in the year ahead.  Fashion experts will tell you what will be big in the world of style.  Hollywood folks try to pick the year’s biggest movies.  Everybody seems to pull out their crystal balls when the new year rolls around.

Money folks are no different.  Every year it seems everyone from seasoned financial professionals to casual observers have an opinion as to what’s going to happen.  While the opinions of economists and money managers are often built on a very fact-based foundation, the forecasts are often times hit or miss.

Take, for example, USA Today’s Investment Roundtable for 2010.  Once a year, USA Today rounds up about a half dozen investment pros including some big names like Goldman Sachs’ Abby Joseph Cohen to forecast the trends they see happening in the upcoming year.  Let’s see how they did in predicting 2010 and take a look at some direct quotes from the story.

“The general consensus of the five panelists is that the recession is over and that a recovery in markets and economies around the world is underway but that risks remain.” – This seems to be right on for the most part.  While unemployment remains high and growth is still relatively stagnant, the economy did seem to at least stabilize over the course of the year.  GDP is starting to show growth again but the economic recovery at this point still remains tenuous.

“David Bianco, head of U.S. equity strategy at Bank of America Merrill Lynch …forecasts a 15% gain for the broad market.” – Pretty good prediction.  The S&P 500 returned 14.32% in 2010.

“David Tice, chief portfolio strategist for bear markets at Federated Investors …believes stocks are still in a secular, or long-term, bear market, is calling for a drop of 40% for stocks.” – And here’s the other end of the spectrum.  The market started to correct around the middle of the year but came nowhere near a 40% drop.  To be fair, the “long-term bear market” he’s forecasting may yet play out.

“…economic growth is actually going to be stronger than expected, as we saw last week with the November jobs loss number…I think those kinds of numbers will continue.” – The job loss picture never really improved.  Unemployment continues near 10% and has failed to budge at all.  The economy is still shedding jobs and, despite billions of dollars of government stimulus, is failing to create any meaningful job growth.

As you can see, the predictions are something of a mixed bag and that’s not really surprising.  Despite all the knowledge and tools at their disposal, even professionals aren’t able to predict the future all the time.  This group actually did pretty well in getting some of the overriding themes of the year correct but it’ll never be perfect.  There’s just too much uncertainty to be accurate on a regular basis.

Plus, as the pros suggested, it just takes one unforeseen event like a credit crisis or terrorist attack to completely rewrite the course of the year.  Even though they are some of the best minds on the planet, when it comes to forecasts it would be wise to use them as a guide but unwise to bank on them.

Photo credit: scottycentral

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Original Post on The Sun’s Financial Diary

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Forecasting The Stock Market Is More Art Than Science

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