Missed It By *This* Much

It’s part of the gig. A Wall Street strategist, economist or even a run-of-the-mill investment manager gets a crack on financial television and is asked about his or her forecast for the market. Instead of wisely objecting to the premise of the question, the poor schlemiel answers and, once matters play out, is shown to have been less than prescient (even though the forecast is likely forgotten). Indeed, one forecast that is almost certain to be correct is that market forecasts are almost certain to be wrong.

The delightful old Mel Brooks/Buck Henry spy satire Get Smart, which was on television from 1965-70, included a number of funny catch-phrases uttered by Don Adams as agent Maxwell Smart (played by Steve Carell in the movie). One of them was the following, offered when Max had, yet again and like our fearless forecasters, screwed up.

So, as year-end approaches, let’s take a look at how much “this much” is — how badly various Wall Street market forecasts missed it with their prognostications for the S&P 500 in 2013. The chart below tracks their “achievements,” noting by how much they missed (using firm forecasts from the beginning of 2013).

Firm / S&P 500 Target / Missed it by this much (%, as of 12.10.2013)

• Wells Fargo / 1,390 / 29.7%
• UBS / 1,425 / 26.5%
• Morgan Stanley / 1,434 / 25.7%
• Deutsche Bank / 1,500 / 20.2%
• Barclays / 1,525 / 18.2%
• Credit Suisse / 1,550 / 16.3%
• HSBC / 1,560 / 15.6%
• Jefferies / 1,565 / 15.2%
• Goldman Sachs / 1,575 / 14.5%
• BMO Capital / 1,575 / 14.5%
• JP Morgan / 1,580 / 14.1%
• Oppenheimer / 1,585 / 13.8%
• BofA Merrill Lynch / 1,600 / 12.7%
• Citi / 1,615 / 11.6%
• AVERAGE / 1,534 / 17.5%
• MEDIAN / 1,560 / 15.6%

In other words, they all missed by miles (short of a major market correction over the next 14 trading days). Nobody was remotely close.

It’s no wonder then that Nassim Taleb tells this sardonic story about forecasting. As the story goes, a trader listened to the firm’s chief economist provide a forecast about the markets, and then lost a bundle acting on it. His boss then fired him. The trader angrily asked why him rather than the economist, as the economist’s poor forecast led to the poor trade. The boss replied, “You idiot, we are not firing you for losing money; we are firing you for listening to the economist.” Interestingly, there is very good evidence that Wall Street firms really do think that such forecasting is essentially worthless (they keep those ideas to themselves, of course).

To be fair, these dreadful results aren’t at all unusual. Market forecasting has a long and ignominious history. For example, Zero Hedge provided an interesting list of economic forecasting failures yesterday here. 

Irving Fisher was a noted 20th century economist. No less an authority than Milton Friedman called him “the greatest economist the United States has ever produced.” But three days before the famous 1929 Wall Street crash he claimed that “stocks have reached what looks like a permanently high plateau.” 

 

More specific market predictions do not generally fare any better.  In December of 2005, Fortune was pitching “10 sturdy stocks” that it claimed were “built to last.” Citigroup at $50 and Washington Mutual at $42 featured prominently. Within two years, both of these stocks were well on their way to zero.

 

Let’s stipulate that these alleged experts — including those offering the firm forecasts outlined above — are highly educated, vastly experienced, and examine the vagaries of the markets pretty much all day, every day. But it remains a virtual certainty that they will necessarily be wrong and often spectacularly wrong.  One can look at many other high-profile stock pickers and find numerous tales of woe (more here). If you think you can predict the future in the markets, think again. Your crystal ball does not work any better than anyone else’s.

 

Since 1990, the Federal Reserve Bank of Philadelphia has conducted a quarterly Survey of Professional Forecasters, continuing research conducted from 1968-1989 by the American Statistical Association and the National Bureau of Economic Research. The survey asks various economic experts their views of the probabilities of recession for each of the following four quarters and comes up with an “Anxious Index” reflecting those asserted probabilities.

 

A CXO study of that data determined that the forecasted probability of recession for a quarter explained absolutely none of the stock market’s returns for that quarter. In fact, the data suggests that the forecasts were a mildly (if not materially) contrarian indicator of future U.S. stock market behavior. The survey reads like a primer on recency bias in that bear markets lead to bearish market forecasts and vice versa while the forecasts have no predictive power whatsoever. The lousy track records highlighted by CXO are entirely consistent with a long line of academic research (most prominently from Philip Tetlock) establishing the lack of value provided by so-called “expert” forecasters.

 

The market predictions offered by experts (and others) and the thought processes underlying them can be very entertaining indeed. They are even the engine that drives much of what pretends to be financial and business television. But none of us should take them seriously. Based upon the historical record (and the 2013 record!), it’s a good thing that so few bother to hold people accountable for their forecasts. If accountability were the norm, who could stand?

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