Wall Street is again making predictions for next year, but don't pay too much attention

Published Wed, Nov 29 20238:48 AM ESTUpdated Wed, Nov 29 20239:02 AM EST

With Thanksgiving over, it's the start of silly season on Wall Street, when stock market watchers make an avalanche of predictions about what the market is going to be doing in the coming year. Don't pay too much attention. Not surprisingly, Wall Street tends to be a bullish group. Deutsche Bank and BMO Capital Markets both predict the S & P 500 will hit 5,100 by the end of 2024, a gain of about 12% from where the S & P is today. Lori Calvasina at RBC Capital Markets and Bank of America's Savita Subramanian have price targets a touch lower, at 5,000. Even former bears like Morgan Stanley's Michael Wilson are less pessimistic than they were. He sees the S & P 500 at 4,500 at the end of next year, barely 1% below where it is now. Wall Street strategists: year end S & P 500 forecasts Deutsche Bank 5100 BMO Capital Markets 5100 RBC Capital Markets 5000 Bank of America 5000 Barclays 4800 Goldman Sachs 4700 UBS Global Wealth Mgmt 4700 Wells Fargo Securities 4625 Morgan Stanley 4500 Source: MarketWatch The median expectation among these strategists is that the S & P 500 will rise to 4,800 next year, a gain of about 6%. If that happens, the S & P will at some point next year eclipse its old record close of 4,796 set in January 2022. Surprise! Wall Street has a terrible track record All of this gets investor juices flowing. The brightest minds on Wall Street are predicting a new bull market! What could go wrong? Unfortunately, none of this soothsaying amounts to much. Wall Street strategists collectively have a terrible track record. New York Times financial columnist Jeff Sommer reported in 2020 that the median Wall Street forecast in the 20 years from 2000 to 2020 had missed its target by an average of 12.9 percentage points a year. That is an amazing miss: the average annual performance of the stock market was about half that figure. It's no better if you look at individual years. At the end of 2020, Sommer noted the median strategist forecast that the S & P would hit 3,800 at the end of 2021. The S & P ended 2021 at 4,766, an error of about 25%. At the end of 2021, the median strategist forecast that the S & P 500 would hit 4,825 at the end of 2022. The S & P ended 2022 at 3,839, a miss of about 20% (nearly 1,000 points!). At the end of 2022, the median strategist forecast that the S & P 500 would hit 4,009 at the end of 2023. As of today, it is at 4,546, a miss of about 12%. One thing to say in favor of the strategists: the dispersion of opinion is usually fairly high, indicating that they are not just blindly following each other (herd behavior). For example, at the end of last year, opinions on the S & P 500 for the end of 2023 ranged from a low of 3,675 at Barclays to a high of 4,800 at Yardeni Research, a spread of about 30%. Everyone has the same problem: predicting the future is really hard If you think strategists should be pitied or laughed at, don't get too cocky: everyone else has the same problem. Strategists have the same poor track record as stock analysts (who make individual stock predictions based on earnings estimates), or professional stock pickers, or market prognosticators, or even the Federal Reserve, which has a poor track record predicting inflation and GDP. Why is it so hard to predict the future, even just one year out? There are two main issues. First, forecasters are riddled with biases that limit the quality of their predictions. For example, strategists who have been right for a few months will likely become overconfident in their ability to make predictions. This may cause them to be bolder than they otherwise would have been. Others may do the opposite: they will exhibit herd behavior, blindly following what others are forecasting. Others may select information for their forecast that only supports their own point of view, while ignoring information that contradicts it. These and dozens of other biases skew the interpretation of the data. Second, the future is so complicated that it is largely unknowable. Events occur that are unpredictable and they affect outcomes. It's uncomfortable to think that we really don't know too much about the future, but it's true. Not a single strategist predicted that 2022 would be the worst year for U.S. stocks since 2008. No one. No one foresaw that Russia would invade Ukraine in March of 2022. Or that Hamas would attack Israel last month. Or that 2020 would bring a global pandemic on the scale of the 1918-1920 Spanish flu outbreak, crippling the world economy and killing millions. Should we stop listening to Wall Street? As a result, you might be tempted to think you should pay no attention to Wall Street, or anybody else. They're all a bunch of fools, right? But that would be a mistake. Wall Street, and I mean analysts, strategists, retail traders, professional traders and market prognosticators, for the most part are not wrong because they are collectively stupid. Just the opposite: most are well-informed and hard-working. They are all up against the same terrible truth about the future: it's largely unknowable. And the biggest problems come from so-called "long-tail" events. These are events (wars, natural disasters, epidemics) that are improbable in any given year but stretched over many years happen more often than you might care to think. My friend Morgan Housel, author of the new book " Same as Ever: Timeless Lessons on Wealth, Greed and Happiness ," put it this way: "If next year there's a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year — or any year — are . . . not bad." Getting comfortable with that is a key to becoming a better investor. If nothing else, the predictions of Wall Street strategists are a good starting point for all of us to think about the near future. I pay attention to them because they often bring up issues or make observations that I hadn't thought of, and I'm better off for their insights. I'm just not going to bet the farm on anything they say. Neither should you.