When you hear or read about an investing expert’s outlook for the year ahead, bear one thing in mind: Every forecast about 2022 was wrong.
Not just a bit amiss, but complete, total busts.
Oh, some strategists will claim victory for saying the stock market
SPX,
would be down in 2022 or that Treasury bonds
TMUBMUSD10Y,
would have yields north of 3%. Or that the yield curve would invert or that inflation would be stickier than anticipated. But they don’t deserve laurels for that.
No one said the market would peak on the first day of the calendar year and go downhill from there and, ultimately, that’s the only tale of 2022 that investors will remember.
Expect forecasts for 2023 to be equally miscalculated.
That doesn’t mean investors should ignore or dismiss the exercise of experts offering outlooks, but it’s why you should question the motives of the soothsayers and revisit one of the greatest market forecasts of all time that’s well on its way to becoming true no matter what the market dishes out next year.
Face it, market strategists and economists don’t make forecasts because they want to, but rather because they have to. Keeping their jobs depends on making mostly lame predictions.
Say something memorable, and the expert and firm might be held accountable for it; pabulum, however, gets overlooked when it’s wrong.
Obvious observations
Thus, forecasts lack insight, gravitating toward the middle ground, to obvious observations on the effect of economic and stock market cycles.
“It looks bad if they don’t have an opinion, but worse when they get something wrong, so most forecasts say as little as possible,” said Jeff Rosenkranz, a fixed-income portfolio manager at Shelton Capital Management, after we finished an interview last week for my podcast, “Money Life with Chuck Jaffe.” “You’re not getting much insight — if they have really valuable insights, this isn’t where they want to tell the world — so most forecasts just aren’t worth much.”
Adds Howard Yaruss, a New York University professor and author of the recent book “Understandable Economics”: “If you are talking about a fine-tuned forecast about stocks and asset values, I don’t see how anyone could go there; accurate predictions aren’t going to happen, or will be luck if they turn out true. Their statements are more about marketing than the market.”
One of Wall Street’s best-known prognosticators says credibility is impossible without accountability, but he acknowledges the tightrope experts walk if they say too much.
Bob Doll, chief investment officer at Crossmark Global Investments, started making forecasts — 10 specific prognostications covering markets, the economy, politics and more — in the 1990s while working for Oppenheimer. He carried the exercise with him during well-chronicled career stops at BlackRock
BLK,
Nuveen and elsewhere, and historically has been right on north of 70% of his calls.
‘Wordsmithing’
“There’s wordsmithing going on; you word them so that you have a noticeably higher than 50% chance of getting them right, and then say a few things you truly believe in that will make you look really smart if they happen without making you look dumb for believing it,” Doll says.
Good forecasts are not just an academic, rote exercise, Doll says, provided that they’re relevant, prompt thoughtful reactions from the audience and that the expert stands by them. Doll revisits his forecasts every quarter and doesn’t alter them in response to current events.
“You call the beast as you see it,” he says, “and then you stand by it and live with it, and you don’t worry about getting them all right because if you haven’t gotten something wrong, you’ve only said the obvious.”
Wildest market forecast
Which leads to what I think is the best, wildest market forecast of all time, even if it’s more obvious than it appears: Dow
DJIA,
116,200.
If that sounds far-fetched with the Dow Jones Industrial Average standing at roughly 33,500 — and down about 8% since the start of the year — consider that the prognostication was made in 1995 with the index hovering around 4,500.
Also, the call was for the benchmark to hit that level in 2040.
Bill Berger, founder of the Berger Funds — which merged into the Janus funds in 2002 — made the call at the first Society of American Business Editors & Writers Conference on Personal Finance in Boston, giving one of the best talks I’ve ever heard, mostly railing against forecasting and the habit of making too much of market milestones.
(If the Dow 116,200 prediction rings familiar to you, chances are you learned about it from me, as I raised it periodically while working as senior columnist for MarketWatch between 2003 and 2017. Today marks the return of my column to this site, and I’m glad to be back.)
Berger cited what he called “the two rules of forecasting.”
Rule 1: For each forecast, there is an equal and opposite forecast.
Rule 2: Both of them are wrong.
Ironically, 116,200 sounds implausible, but looks dead solid perfect.
By 1995, Berger had worked in investments for 45 years; when he got started, the Dow was below 200. Mathematically, he saw the Dow’s future as reflecting the past; repeating the growth he’d lived through would push the benchmark to 116,200 over the next 45 years.
A septuagenarian at the time, Berger wryly suggested that if he was proved wrong, people come find him to discuss it; sadly, he died a few years later.
The long game
Despite the outlandishness of the forecast, Morningstar calculates that hitting the target would have required an annualized gain of roughly 7.35% over the 45 years. When the Dow peaked on Jan. 4, 2022, the necessary gain was down to 6.33% annualized.
As of Dec. 1, Morningstar calculates that hitting 116,200 in the fall of 2040 will take a 7.07% annualized gain, which feels like a safe bet.
Thus, 2022’s disappointments haven’t derailed long-term investors any more than they’ve crashed the greatest-ever market forecast.
That’s the lesson to remember when confronted with 2023 forecasts; neither the market’s issues nor experts’ ability to diagnose them will derail long-term financial plans or make lifetime goals unreachable.
That’s a prediction worth betting on.
Chuck Jaffe is a MarketWatch columnist and host of the “Money Life with Chuck Jaffe” podcast.
