OPINION

JUST PLAIN TALK: Forecasting 12 months of market performance isn't possible

Buz Livingston
Buz Livingston

At the end of every year, almost on cue, my inbox fills up with forecasts from stock market mavens (alleged). By no means am I denigrating their work, these prognosticators are smart, splendid writers.

Predicting how the stock market will perform over the 12 months is a fool’s errand, full stop. It will either go up or it will go down. Historically it rises more than it falls, but you never know. However, market forecasts are consistently wrong.

Last December, the median consensus was the market would rise albeit rather modestly, just under 3%. Well, they got the rising part right but missed the number dramatically; the S&P 500 closed the year with a 15% gain. The small-cap Russell 2000 did even better. Aided by a record-setting fourth-quarter return of over 31% small caps returned almost 19%.

As Yogi Berra said, it’s tough to make predictions, especially about the future. Proving the Hall of Fame catcher correct, when markets swooned in early spring, the consensus forecast, according to Bloomberg, was for a double-digit slide. In baseball, it’s a swing and a miss.

Measured by calendar years, markets fall about one-third of the time. The last 20 years have been better with only five down years. Despite a reasonable shot at a down market, there has never been a consensus negative annual forecast. This year, after markets collapsed, the overall forecast was for a negative return for 2020. See the numbers listed above. The Federal Reserve’s quick and decisive action buoyed markets. More should have gone to individuals and small businesses and the resulting economic activity would have strengthened the economy, but that’s another story.

The New York Times (Dec. 20, 2020) quoted Paul Hickey, co-founder of Bespoke Investment Group. Hickey’s data showed over the last 20 years, the spread between performance and forecasts was over 12%. “What good is the target in the first place,” Hickey noted. Are they worthless? Perhaps, but humans are hard-wired to look for patterns; it’s how we evolved. Forecasts do fill a need but take them with the proverbial grain of salt and heed Berra’s warning.

Despite the vagaries of market returns, over time I remain bullish. Every month I buy stocks and bonds; the market rises more frequently than it falls. It’s reasonable, but still risky, to assume the world economy will keep growing and profits will flow to investors who own stocks.

I’ve given up picking individual stocks or trying to time the market. Having a portfolio of low-cost index funds, at least for the bulk of your investments, gives you the best chance to reach your goals. It’s not a guarantee, but nothing is.

Remember, 15% returns are an anomaly. From 2000-2019, the S&;P 500 grew 6.1%, but only 3.8% after inflation. I predict even more modest returns for the next 20 years. If I’m around and I’m wrong, I won’t be disappointed.

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.