Should Expert Predictions and the Financial Media Guide Your Investment Decisions?

2023 was an amazing year for investors, even though no one expected it! Rewinding to one year ago, investors were still in the doldrums after a horrible 2022 that saw both stocks and bonds decline by double digits. On the docket for 2023 was a year full of interest rate hikes, inflation pressures, wars, and – so we all thought – a recession. As a result, many investors were content to accept a (finally!) decent return on cash and just wait out the year. The Wall Street Journal summed it up well: “Almost no one thought 2023 would be a blockbuster year for stocks. They could hardly have been more wrong.”

Despite what the investment strategists, economists, and media pundits may say, it will be very difficult to correctly predict how the economy and your investments will perform in 2024. Even if someone predicts accurately in one area – say, geopolitical risks or corporate profits or consumer strength – how the market reacts and moves during a year is so complicated that few, if any, can be right enough to make a profit off it on a consistent basis. Because not only does someone have to address data outcomes or event-specific risks, but that investor would also need to predict how human behavior reacts to that myriad of interwoven factors.

The last four years are a great string of examples for this.

2020:

• What was predicted: Well, we’ll give everyone a “pass” for 2020.
• What happened: A global pandemic, of course. In investing we call these “black swan” events – world-changing events that no one predicts but inevitably surface occasionally.
• How markets performed: Despite a historic crash in the spring of 2020, everything did quite well to end the year. The S&P500 return was 18.4% for the calendar year.
• Verdict: No one predicted the violent crash nor the rapid recovery in 2020.

2021:

• What was predicted: A continued economic recovery, but still pretty average market returns. On the high end, some predicted double-digit returns but there were just as many experts forecasting a flat stock market.
• What happened: Despite persistent effects from the virus, the US economy surged back to life as consumers just shifted where they spent money and companies adapted. Inflation was the “consequence” from combining a robust, stimulus-fueled recovery with supply chain issues, but during 2021 it still hadn’t hit full swing yet.
• How markets performed: The S&P 500 hit 70 new all-time highs on its way to a monster 28.7% gain.
• Verdict: At this point the pandemic still wasn’t behind us. So, it’s understandable how few anticipated the “V-shaped” economic recovery, and none nailed just how stellar market returns would be.

2022:

• What was predicted: Maybe it was the rose-colored glasses of 2021 since, despite high valuations and a telegraphed set of Federal Reserve rate hikes to combat inflation, forecasters said markets would be up.
• What happened: Interest rates surged at the fastest pace in decades and US inflation peaked at 9.1% in June. The economy still managed to grow about 2%, but there was widespread pessimism.
• How markets performed: The S&P 500 posted its worst year since 2008 (-18.1%) and bonds had their worst year ever (the Bloomberg Barclays Aggregate Index fell over 13%). Areas with the highest valuations and best 2021 returns fell the most in 2022: technology companies, “meme stocks,” cryptocurrencies, etc.
• Verdict: Another miss!

2023:

• What was predicted: 85% of economists in a Financial Times poll expected a US recession in 2023 and the IMF said that a third of the global economy would be in recession along with the United States. And it wasn’t just economists and rap artist CardiB…we all figured it would happen in 2023.
• What happened: Not only did the US avoid a recession, but the global economy managed better than expected on average. Few would have also predicted a banking crisis, a government debt showdown, or Artificial Intelligence mania to fill the year.
• How markets performed: It was a banner year for stocks (S&P 500 up 26.3%), and everything did well in the 4th quarter rally.
• Verdict: No doom and gloom. And even for the optimists, investment returns exceeded all forecasts.

It’s clear that relying on future forecasts would have been a dangerous investment strategy over the last four years. Fear and greed, the opposing sides that encompass much of human investing behavior, influenced investors to be overly cautious heading out of the covid crash and 2022 declines but also overly confident after 2021’s rally. Just imagine the difference in portfolio return had you heeded the collective advice of the prognosticators vs. sticking with a disciplined investment strategy!

Poor predictions aren’t just a post-covid phenomenon (2020 onward). A piece by the New York Times looked at a 24-year time period: 2000 through 2023. Rather than just giving a “verdict” as I did above, they measured the difference between the median forecast and actual returns of the S&P 500. For example, in 2022 a median forecasted rise of 3.9% was wrong by a margin of ~24% given the S&P 500’s 18% fall. So, how far “off” is Wall Street each year?