2022 Forecasting Follies
It’s the time of year when all the major banks make their forecasts for the coming year. These forecasts get a lot of attention in the news and investment strategies are often developed based on these outlooks. But, are they really worthy of use for your investment strategy?
We’ve been tracking the economic forecasts of major banks for the past few years and comparing them to the actual performance of the S&P 500. Before you react to the new 2023 forecasts, let’s look back at previous years’ outlooks to see just how reliable (or unreliable) these one-year forecasts really are.
How Did the 2022 Economic Forecasts Fare?
The S&P 500 closed 2022 at 3,839.5, down almost 20% on the year for the worst year since 2008. This is compared to the average 2022 forecast of a market increase to 4954 by the banks below. Their forecasts were 29% higher than the actual close! Big miss!
We have been tracking these various S&P500 Index forecasts for fun since 2017. Here is our sampling of how banks have done over that period:
| |
2017 | 2018 | 2019 | 2020 | 2020(1) | 2021 | 2022 |
|---|---|---|---|---|---|---|---|
| Actual Close | 2674 | 2486 | 3221 | 3749 | 3749 | 4766 | 3840 |
| Average Forecast | 2372 | 2851 | 2912 | 3306 | 2883 | 4058 | 4954 |
| "Miss" | -11.3% | 14.7% | -9.6% | -11.8% | -23.1% | -14.9% | 29.0% |
(1) Note: in 2020 after COVID, most banks readjusted their forecasts. As you can see in the table, they would have been closer if they had stuck to their original forecasts.
And here are the last 3 years by bank in our sample:
| Investment Bank | 2020 S&P 500 Forecast |
"Miss" | 2020 S&P Forecast Revised Due to COVID |
"Miss" | 2021 S&P 500 Forecast |
"Miss" | 2022 S&P 500 Forecast |
"Miss" |
|---|---|---|---|---|---|---|---|---|
| Actual Close | 3749 | -11.8% | 3749 | -23.1% | 4766 | -14.9% | 3839.5 | 29.0% |
| Average Forecast | 3306 | 2883 | 4058 | 4954 | ||||
| Bank of America | 3300 | -12.0% | 2600 | -30.6% | 3800 | -20.3% | 4600 | 19.8% |
| Barclays | 3300 | -12.0% | 3000 | -20.0% | 4000 | -16.1% | 4800 | 25.0% |
| BMO | 3400 | -9.3% | suspended | N/A | 4200 | -11.9% | 5300 | 38.0% |
| Citigroup | 3375 | -10.0% | 2700 | -28.0% | 3800 | -20.3% | 4900 | 27.6% |
| Credit Suisse | 3425 | -8.6% | 2700 | -28.0% | 4050 | -15.0% | 5000 | 30.2% |
| Deutsche Bank | 3250 | -13.3% | 3250 | -13.3% | 3950 | -17.1% | 5000 | 30.2% |
| Evercore ISI | 3400 | -9.3% | N/A | N/A | 4110 | -13.8% | 5100 | 32.8% |
| Goldman Sachs | 3400 | -9.3% | 3000 | -20.0% | 4300 | -9.8% | 5100 | 32.8% |
| J.P. Morgan | 3400 | -9.3% | 3400 | -9.3% | 4400 | -7.7% | 5050 | 31.5% |
| Jefferies | 3300 | -12.0% | N/A | N/A | 4200 | -11.9% | 5000 | 30.2% |
| Morgan Stanley | 3000 | -20.0% | 2700 | -28.0% | 3900 | -18.2% | 4400 | 14.6% |
| RBC | 3350 | -10.6% | 2750 | -26.6% | 4100 | -14.0% | 5050 | 31.5% |
| UBS | 3000 | -20.0% | 2850 | -24.0% | 4100 | -14.0% | 4850 | 26.3% |
| Wells Fargo | 3388 | -9.6% | 2760 | -26.4% | 3900 | -18.2% | 5200 | 35.4% |
Some highlights (or “lowlights”) from this table:
Not one analyst was low on their prediction – all were high. Last year, all the banks were low.
The closest in 2022 was Morgan Stanley who still missed by 14.6%!!
BMO’s forecast was the furthest and missed by 38%! This is compared to their 2019 forecast being only -2.2% from the actual close - the closest forecast we’ve seen yet. Being lucky one year does not mean you’ll be lucky again.
We’ve already recorded the forecasts for 2023, and will revisit after next 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. Forecasts are often based on recent events, which as you can see from the huge misses in 2020 due to COVID, are often very unpredictable. 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.
Sources:
https://finance.yahoo.com/news/bank-america-predicts-p-500-140000118.html
https://news.yahoo.com/wall-streets-2022-outlook-for-stocks-153935831.html
https://www.marketwatch.com/story/proceed-with-caution-heres-what-wall-street-analysts-see-for-the-u-s-stock-market-in-2022-11638986154
https://www.marketwatch.com/story/highly-valued-s-p-500-index-is-near-the-top-of-its-85-year-trend-channel-says-deutsche-bank
https://www.cnbc.com/2022/01/10/evercores-emanuel-sees-the-sp-500-reaching-5100-says-investors-should-seek-out-value.html
https://www.marketwatch.com/story/jpmorgans-s-p-500-forecast-for-2022-is-among-the-most-bullish-on-wall-street-heres-the-biggest-risk-it-sees-for-stocks-11638273921
https://www.tker.co/p/morgan-stanley-2022-outlook
https://saf.wellsfargoadvisors.com/emx/dctm/Research/wfii/wfii_reports/Investment_Strategy/aasr.pdf
