2020 Forecasting Follies
For the past several years, we have looked back at the market forecasts provided by the economists of the major banks to see how reliable their one-year forecasts have been. After all, these are the “experts.”
It is an annual tradition. As the year ends, the leading economists publish S&P 500 forecasts for the upcoming year. The press eats this up and the headlines ring out. Brokers and investment advisers for each of the respective firms communicate to clients. Investment recommendations are made, and investment strategies are deployed based on these forecasts.
Results of 2020 Economic Forecasts from Major Banks
So, are these forecasts worthy of using for your investment strategy? As you can see from the table below, results have not been very good over time. And with the S&P 500 closing at 3749 this past year, the inability to predict the market in the short-term persists:
The average “miss” was short by 11.8%.
Not one analyst was high on their prediction – all were low.
The closest was Credit Suisse who missed by -8.6%.
How the March 2020 Decline Affected Forecasts
However, this is where it gets really interesting. The numbers above were their original 2020 forecasts. When the dramatic (and unpredicted) market decline of March came along, most bank analysts reacted by throwing out their original predictions. And most in our sample set revised them significantly downward or just “suspended” making any predictions at all.
Below is a summary of the revised predictions captured in April 2020 when the S&P 500 was languishing in the 2700 range.
What do you notice?
The average forecast was lowered by 13%. (Overweighting recent data is called “recency bias”).
The average “revised” forecast missed the end of year target by 23%. That is HUGE particularly since the end of the year was only 8 months away! (Another bias called “overconfidence”).
No one revised upward, which would have been a true contrarian against the “herd mentality” (another well-known bias).
Only those that held steady (JP Morgan, Deutsche Bank) did not miss by more than 20%!
How Should You React to Economic Forecasts?
The error rate continues to be remarkably high. The reality is that short-term forecasting is quite hard - if not impossible. What we generally see is that forecasts reflect more what we just went through and less what we will be going through – for no one knows!
So, what do you do?
First, you can use these forecasts for fun or learning, but not for investing. Probably best just to not listen and avoid being tempted to take them too seriously.
Second, avoid recency bias, herd mentality, and overconfidence. Make sure you have a well-diversified investment allocation focused on what risk you can assume. In fact, investors that didn’t make any changes and rode out the wild wave crushed these forecasters in total returns.
Third, keep your timeline in perspective. Most people have mid-to-long-term investment horizons and what happens in a month or quarter or even a year, does not really matter that much.
Stay Invested
Interestingly, from the period November 1, 2018, to December 31, 2020, the S&P 500 had two “corrections”– December 2018 and March 2020. Both of these had rather quick recoveries in the following months. If you panicked and temporarily exited until the markets recovered, you may have lost over 40% of your potential value in that short window versus just riding it out. While there is never an assurance of a rapid recovery (it took about 7 years to climb out of the 2008 correction) staying invested and being patient has tended to reward investors who really do have a longer horizon.
We have already captured the banks’ 2021 forecasts and will report again next year.
