Analyst Forecasts: Lessons in Futility


Joachim Klement, CFA, will be presenting at the 73rd CFA Institute Annual Conference, which will be held 17–20 May 2020 in Atlanta.

The year 2018 is coming to a close and with it the endless reports on strategists’ stock market forecasts for the coming year. And rest assured, just like every year, someone is going to ask me where the FTSE 100 or the S&P 500 is going to be at the end of 2019.

It is common knowledge that all forecasts are wrong, but many investors still think forecasting one-year stock returns is a useful exercise. When it comes to long-term forecasts, there might be some value in them, but return forecasts over time frames like one year or less are extremely unreliable. In fact, anyone who uses these forecasts for investment decisions should seriously reconsider their investment process.

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Let’s take, for instance, the forecasts made for stock markets at the beginning of 2018 by strategists from prominent banks around the world. For the S&P 500, the median forecast price at the end of 2018 was 2950 points, for a 2018 calendar year return of 10.3%. As of this writing, the realized return for 2018 was -7.71%. Analysts were overly optimistic going into this year and the difference between forecast and realized return was about 18 percentage points.

In Europe, the situation is comparably awful. Strategists expected a 1.5% annual return for the FTSE 100 at the beginning of the year, but at the moment the realized return is -12.69%. For the EuroStoxx 50, the predicted return was 7% and currently stands at -14.38%. That’s an estimation error of more than 21 percentage points and a buy recommendation at the beginning of the year for eurozone stocks because they would do exceptionally well when in truth they lost money for investors.

And yet the picture for 2018 is not a particularly disastrous one. Strategist forecasts for the S&P 500 have been off by more than 10 percentage points in 13 of the last 20 years! Strategists can be happy if they call the direction of stock markets correctly. For the S&P 500, strategists got the direction wrong in 11 of the last 20 years. They were right only nine times out of 20. So, if they are basically no better than the flip of a coin when predicting the direction, why would anyone expect them to call both the size of the move as well as the direction? Anybody who sees this track record and still wants to know what the year-end target of the stock market is should have his or her head examined.

The Future of Investment Management

To be clear, I don’t claim that I can predict the stock markets any better than my colleagues who contributed to these forecasts. But why should any investor waste time with such futile exercises? Anyone who claims to be able to predict stock markets over the coming year is, in my view, a charlatan selling snake oil. As William J. Bernstein observed: “The reason that ‘guru’ is such a popular word is because ‘charlatan’ is so hard to spell.”

And speaking of charlatans: Have a look at the forecasts of cryptocurrency “experts” and “gurus” for the year 2018. There is a website where someone apparently wanted to build a career by predicting crypto returns.

Bitcoin at year-end 2018 was predicted to be at $75,000 (560% return) and $750,000 (1000% return) at year-end 2019. As of this writing, bitcoin stands at $4,107.42 (-70% return). The Ethereum year-end forecast was for $11,000 (819% return) at the close of 2018. Today, it’s at $114.62 (-86% return). Ripple was supposed to end the year at $3.50 (161% return) but instead trades at $0.37 (-81% return).

This is a level of forecasting error that should ban these forecasters from your inbox for life.

For more from Joachim Klement, CFA, don’t miss Risk Profiling and Tolerance, from the CFA Institute Research Foundation, and sign up for his regular commentary at Klement on Investing.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/MHJ

Joachim Klement, CFA

Joachim Klement, CFA, is a trustee of the CFA Institute Research Foundation and offers regular commentary at Klement on Investing. Previously, he was CIO at Wellershoff & Partners Ltd., and before that, head of the UBS Wealth Management Strategic Research team and head of equity strategy for UBS Wealth Management. Klement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a master’s degree in mathematics. In addition, he holds a master’s degree in economics and finance.

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