If you’ve turned on your TV over the last two weeks, you’ve seen them: experts telling you what to expect during 2011. From where the stock market is headed to what’s going to happen in Congress and in Hollywood, this is the time of the year when the “experts” step out from behind their crystal balls and get some much appreciated, if not well deserved, face time.
But while these prognosticators are sometimes enlightening and often amusing, are they worth watching? In my opinion, at least when it comes to predicting the stock market, no. And I’m not just guessing – I’ve got proof.
At the end of each year since 2005, I’ve conducted on-camera interviews with the chief economist of one of the most prominent market research firms on the planet. I’ve asked three simple questions: exactly how much will the stock market change over the next year, exactly what will happen to the price of a barrel of oil, and exactly what will happen to housing prices. Taken alone, the answers I’ve gotten each year seemed intelligent enough. But when you take them all together, an interesting pattern begins to develop.
Check out the following news story and you’ll see what I mean. In this story, we re-run sound bites of our Harvard-educated economist predicting the stock market for the last five years, as well as what actually happened. Then meet me on the other side and I’ll tell you exactly how you can use this information to attain your 15 minutes of fame.
Well, there you have it. Here’s a recap of what David Wyss of Standard & Poor’s said on-camera, as well as what actually happened:
2005 Forecast: “My guess maybe 6, 7 percent by this time next year.”
2005 Reality: Pretty close. The stock market was up 5 percent.
2006 Forecast: “We’re looking for the market to up about 6 percent by the end of next year.”
2006 Reality: The market was up 16 percent, so a guess of 6 percent? Not so hot.
2007 Forecast: “We’re still expecting good earnings this year, probably in the high single digits.”
2007 Reality: This was close, depending on what you’d call “the high single digits.” The market was up 6 percent.
2008 Forecast: “We’re expecting see high single-digit gains, probably in the 8 percent range.”
2008 Reality: In one of the worst years in its history, the stock market fell 37 percent.
2009 Forecast: “I think by the end of the next year we’ll be up by 10, 15 percent.”
2009 Reality: He got the direction right but was too pessimistic. After a terrible 2008, the stock market actually gained 26 percent.
2010 Forecast: “We expect the market to be up about 12 percent this year.”
2010 Reality: Bingo. Depending on how you measure it, he hit the nail directly on the head. The S&P 500 return for 2010 was 12.78 percent.
At first glimpse, you may think that Mr. Wyss did a pretty decent job over the last six years – after all, with the exception of 2008, he wasn’t all that far off. But let’s look behind the curtain and see what our wizard is actually up to. Consider the following…
1. He basically guessed the same thing every year: In 2005, 2006, 2007, and 2008, his answers were virtually identical: “Up 6,7 percent”… “Up 6 percent”… “Up high single digits”…”Up 8 percent”… Then, in 2009 and 2010, he got a little more bullish, with guesses of up 10 to 15 percent and up 12 percent. And his prediction for 2011 was also up 10 percent. That’s seven years of pretty much identical predictions.
2. He missed huge moves in the market. One might find these predictions remarkably consistent in light of the fact that the market has been anything but. The Dow Jones Industrial Average started 2005 at about 10,600. By October of 2007 it had climbed to more than 14,000. But 18 months later, in March of 2009, the Dow hit 6,600 – a gut-wrenching 50 percent decline from the highs. From that point, the Dow has since soared 77 percent to today’s 11,700.
Those are major moves, both down and up – and not one was predicted by our “expert.” Instead, he basically predicted up “high single digits” pretty much every year – which is exactly what the long-term average return is for the stock market.
3. He always guesses up. Most stock market prognosticators usually predict a higher market ahead. Why? For one, many work for Wall Street investment houses – saying the market is likely to fall could be bad for business. Another reason for rosy predictions might be that most people tend to be optimistic about the future. But the chief reason could very well be that more often than not, the stock market does go up from year to year. How else could the Dow Industrials be at 138 in October of 1938 and 11,674 today?
What can we learn from this?
Please don’t think I’m picking on Mr. Wyss of Standard & Poor’s. I’m not – and that’s the point. I think Mr. Wyss is representative of nearly everyone you see making these kinds of predictions. The simple truth is that there are far too many variables for anyone to be able to make a reliable prediction as to the direction of financial markets. People like you, me, or David Wyss may be able to accurately predict a bounce-back after a big stock decline. We might get clues as to future stock prices from interest rates trends, employment reports, or corporate earnings – all other things being equal. But all other things are rarely equal: Nobody could have predicted Osama Bin Laden, or the Gulf oil spill, or the full ramifications of the housing crash.
In short, this isn’t the weather. Which, judging by how often my local forecasters get it wrong, is hard enough to predict. Unlike the weather, stock prices are influenced by human beings and a potentially infinite number of unpredictable events. At the end of the day, predicting the stock market is a parlor game.
How to play a stock market expert on TV
Now that we’ve pulled back the curtain and exposed the Wall Street wizards for what they are, you can use this information to get your 15 minutes of fame. Just call your local TV station and tell them you’re ready, willing, and able to tell their viewers exactly where stocks will be one year from now. Then drive to the studio, sit next to the anchor, look into the camera, and say, “The stock market will go up high single digits this year.”
You’ll probably be right.