What Are Stocks Going To Do This Year?
No clue.
If anyone tells you they know, please do yourself a favor and run as far away from that person as possible.
Prediction is very difficult, especially about the future.
-Yogi Berra
Even the people whose job is to predict a 12-month price target for the stock market are off the mark year after year.
Bottom-up analysts (i.e., people who follow individual companies) and strategists (i.e., people who follow broad economic trends like inflation, GDP growth, and interest rates) are professionals whose job is to predict the 12-month price for the S&P 500.
At the start of last year, analysts forecasted the S&P 500 would rise by 7.9%. This forecast is EXACTLY the average price return of the S&P 500 over the previous 97 years!
The S&P 500 returned 23%, so they were off the mark by ~15%. Ouch.
Strategists didn’t fare any better.
They were pretty bearish (i.e., pessimistic) coming into 2024 with a forecasted return of 1.9%. ☹
The red bars below show the 2024 price predictions of these strategists for the S&P 500.
The orange bar shows the average price return of these strategists.
The price at which the S&P 500 started last year is in light blue.
The dark blue line is what the S&P 500 ended for 2024.
The strategists were just off by 21%!
One of them got fired. Another moved to another department. The rest are still playing a dart game.
Was 2024 just a bad year for forecasters?
Sadly, for them, no.
The chart below shows the last 21 years (2003-2024) of forecasts for the S&P 500 from bottom-up analysts and strategists:
Over this time frame, the correlation between forecasted and actual returns for the bottom-up analysts and strategists was 0.2 and 0.0, respectively. Translation: there is no link between their predictions and actual returns.
Even the most serious efforts to make predictions can end up so far from the mark as to be more dangerous than useless.
-Peter Bernstein
Do you want to give it a try?
Here are the S&P 500’s annual returns over the last 97 years:
Good luck seeing a pattern.
I ran a quick regression analysis (yes, I run these for fun) just to make sure there is no real link between this year’s returns and next year’s.
I’m looking for the correlation coefficient (i.e., how strong the linear relationship is between this year’s returns and next year’s) between these two metrics.
+ 1 means a perfect positive relationship (e.g., if this year is up, most likely next year will be up)
0 means no relationship at all
-1 means a negative relationship (e.g., if this year is up, most likely next year will be down)
The result >drum roll please<
0.06!
That number might as well be zero. This means there is very little (if any) relationship between this year’s returns and next year’s.
So, the bad news is that we don’t know what will happen next year in the stock market.
The good news is that we don’t need to know.
We learned last week that the stock market goes up over time (see chart below):
What you focus on magnifies.
Focusing on the decades rather than the days will likely help you sleep better at night.
Now here’s what I’ve been reading and watching lately:
The story why people need to have a minimum level of stress by Morgan Housel
The story of the richest woman in America in the early 1900s - Hetty Green - on Founders Podcast
The story of the founder of IKEA - Ingvar Kamprad - on Founders Podcast
How To Know A Person by David Brooks
One of favorite children’s book (I have a 5-year old): The Boy, The Mole, The Fox, and the Horse by Charlie Mackesy
