I enjoy the holiday season, I really do. But around this time of year, I start to channel my inner Grinch, or more specifically, one of his infamous quotes: “There’s one thing I hate – all the noise, noise, noise, noise!”
The volume of information and opinions swirling around the financial markets is deafening year-round, but it seems like the period between Thanksgiving and New Year’s is always especially chaotic.
First, there’s the annual tradition of strategists at all the major financial firms — BofA Merrill, Barclays, Citi, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, UBS — dutifully rolling out their forecasts for the coming year, and all the financial media outlets dutifully covering the “story.” Most of the parties involved know the forecasts are almost always wrong and add no more value for investors than the Whos blowing their Who-whoobas, banging their gar-ginkas, and slamming their sloo-slunkers.
Take last year, for example. Out of 16 forecasts heralded by Yahoo Finance at the end of 2016, the closest one undershot the S&P’s return (based on the Dec. 22 close) by 7%, while the farthest was more than 15% off. This is not an unusual occurrence, and industry observers like Barry Ritholtz have written for years about the folly of forecasting. In a recent white paper, Morgan Housel put it this way:
Think about market forecasts. Evidence that they have any actual predictive ability is hilariously bad. I once showed that if you just assume that the market goes up every year by its historic average, your error rate is lower than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street institutions. Predicting recessions isn’t much better. And since big events come out of nowhere, forecasts may do more harm than good, giving the illusion of predictability in a world where unforeseen events control most outcomes.
The year 2008 is a perfect example. The most bearish Wall Street forecast made at the end of 2007 was Morgan Stanley’s call for the S&P to finish 3.5% higher, while the index actually fell 37% in 2008. When it comes to predicting the future, no one knows what they’re talking about.