2021 Forecasting Follies

Jan 5

Written By Mike Mulcahy, CFA® CPWA® CTFA

How Did the 2021 Economic Forecasts Fare?

It’s that time of the year! When all the major banks make the forecasts for the year. Yet, before you listen to their 2022 forecasts, we must look back at their previous years’ outlooks to see just how reliable (or unreliable) these one-year forecasts really are.

News channels and newspapers love these forecasts. And investment strategies are often developed based on these outlooks. But, are they really worthy of use for your investment strategy? Let’s take a look once again.

Highlights

The S&P 500 closed 2021 at 4766, up almost 27% on the year, compared to the average forecast of 4058 by the banks below. That’s an almost 15% miss!

Some highlights (or “lowlights”) from this table:

The average “miss” was short by 14.86%.
Not one analyst was high on their prediction – all were low.
Forecasters have been low on average 5 of the last 6 years.
The closest in 2021 was JP Morgan who missed by only -7.68%.
Citigroup and Bank of America – two names everyone knows – missed by over 20%! Ouch! But that is better than they did last year!

How to Respond to Annual Forecasts

First, you can use these forecasts for fun or learning (like we do), 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.
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. Long-term trends are statistically more reliable.

Stay Invested with a Well Thought Out Plan

Investing isn’t a game of guessing from one year to the next. It’s trying to use statistics to your advantage over time. Trying to forecast in the shorter term is quite hard – there is just too much randomness in the stock market. Instead, for most investors, keeping a well-diversified portfolio designed to your specific needs, risk tolerance and timeline continues to be the most logical course of action.

Do yourself a favor and don’t listen to the forecasters. Have a plan and stick with it.

Sources:

https://www.cnbc.com/2021/12/30/stock-market-futures-open-to-close-news.html
https://markets.businessinsider.com/news/stocks/stock-market-outlook-value-rally-bofa-sp500-tepid-returns-2021-2020-12
https://www.marketwatch.com/story/investors-are-overlooking-this-one-thing-major-bank-says-as-it-sets-4-000-target-on-s-p-500-11606908803
https://www.marketwatch.com/story/stock-market-pros-are-having-a-tough-time-imagining-an-s-p-500-slump-in-2021-11608855406
https://markets.businessinsider.com/news/stocks/stock-market-outlook-turning-point-citi-levkovich-modest-sp500-gain-2020-11-1029817174
https://www.moomoo.com/news/post/3307815?level=1&data_ticket=1640027998411929
https://www.rbcgam.com/documents/en/articles/global-investment-outlook-2021-newyear.pdf
https://www.forbes.com/sites/jonathanponciano/2020/12/21/stock-market-2021-outlook-goldman-sachs-morgan-stanley/?sh=127932905afd

economic forecast

Mike Mulcahy, CFA® CPWA® CTFA

With the founding of Kings Path Partners, Mike brings a diverse set of professional and personal experiences into the wealth services business. His professional roles and community experiences give him a unique and real perspective into the needs of families, entrepreneurs, and business executives. Previous roles include president of a $6B investment management firm; management consultant with McKinsey & Company; VP of corporate finance & strategy with Compaq/HP; and managing director of an entrepreneurial web-based business. He is also an active venture investor with a focus on impact investing and social enterprises.

Mike earned an MBA from the Harvard Graduate School of Business and completed an Executive Program in Portfolio Management at the University of Chicago. He graduated summa cum laude with a Bachelor of Science in Economics with a minor in Chemistry from Texas A&M University. He holds designations as a Certified Private Wealth Adviser®, Chartered Financial Analyst®, and Certified Trust and Fiduciary Advisor (CTFA). He is a member of the Investments & Wealth Institute® and the CFA Society of Houston.

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