The reality behind forecasts

As we approach the New Year, strategists at investment banks and some fund managers produce their forecasts for the performance of the stock market in the year ahead. The question is: Should we take any notice?  An analysis of stock market forecasts suggests we should not. One study of 22 American analysts for the years 2000 to 2014, revealed that their predictions were off by an average of nearly 15 per cent each year. These strategists did not foresee any negative years and at the same time underestimated the gains in good years. The forecasts tend to cluster around a prediction of modest gains each year.

There is a herd mentality at play here. If your forecasts are similar to your peer group, you have the benefit of safety in numbers. The analyst is less likely to get dismissed if he or she is one of many that get it wrong. On the other hand if you do not stick with the herd and you get it wrong your position is more difficult. In other words, if you want to protect your career; avoid independent thought.

Meanwhile the herd instinctively extrapolates the trend of the recent past because it’s the safest, least controversial position to take. So if no one should take these forecasts seriously, why are they produced every year? Essentially they form part of a marketing effort to boost the profile of various investment banks; nothing more than that.

Brian Durrant