Making Sense of Stock Market Predictions

One of my favorite periodicals authors, Jason Zweig, recently penned an article in his Intelligent Investor column titled Making Sense of Market Forecasts. I think it’s a good article for just about everyone to read. It’s Jason’s opinion that, “taken together, forecasts can point toward the best and worst outcomes you can reasonably expect in a given year—and tell you how confident you should (or shouldn’t) be.” I largely agree. We know that the expectations, particularly of consumers, plays a large impact on the economy. However, I think that it’s impossible to consistently predict its effect on the economy, and in this instance, the stock market.

Zweig points out that, according to forecasters, “U.S. stocks will go up roughly 10%, 10-year Treasury yields will run around 3%, inflation will be a bit under 2%, and the economy will expand 3% or so.” To me, this seems like a standard prediction simply using long-run averages. I think that, by-and-large, forecasters (analysts) don’t want to put their necks out there and make any bold predictions that don’t align with the rest of the pack. Over the long run, stocks have gone up an average of approximately 10% per year. But if you look at the return in any given year it’s very unlikely to be close to 10%. Sometime I’ll bring up some charts and show you. Zweig also points out this herd mentality amongst analysts: “Therefore, while most pundits tend to cluster around a safe consensus, a few stake out the risky but potentially lucrative ground of extremely bullish or bearish predictions. If they turn out to be right, their accuracy will seem miraculous and they will be famous; if they turn out to be wrong, most people will forget.” I’m not a huge fan of analysts myself, at least of their predictive powers. Analysts do serve the function of keeping management somewhat honest, but that’s another story for another time. There’s a lot more to the article, such as data on when predictions tend to be more accurate (the short term). If it seems like something that might be of interest to you, I recommend you check it out.

Edit: Unfortunately, the content originally published is no longer publicly available on WSJ’s website.

One Response to “Making Sense of Stock Market Predictions”

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  1. Money+Power says:

    Zweig is the main reason I subscribe to the WSJ. I read other articles of course but I look most forward to his.

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