As 2013 draws to a close, I will be highlighting my most popular pieces of the year as determined by readership. This first one — #10 — is also the most recent. It’s from earlier this month. Enjoy.
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.