In March of 2015, Marketwatch columnist Paul Farrell wrote, “It’s time to start the countdown to the crash of 2016. No, this is not a prediction of a minor correction. Plan on a 50% crash.”1
He then cited the major factors that would lead to this market collapse: overvalued tech companies, political turmoil, and the fact that we were several years overdue for a correction.
Yet while the causes of Farrell’s predicted market disaster were all very real, his prediction of what they would lead to was completely wrong. As you recall, in 2016 the S&P 500 gained nearly 12% for the year with the usual dips along the way. But nothing remotely resembling a 50% crash.
This is a dramatic example of how a market prediction made in earnest can be spectacularly wrong. To be fair, in his article Farrell cites other pundits who were predicting 50% gains. They were just as wrong, demonstrating that intelligent people given the same set of facts can come up with wildly varying predictions.
There’s a Strong Market For “The Future”
It’s good to remember this as the financial media are weighing in with their market forecasts for 2019 and beyond.
Newsweek did a roundup of predictions from analysts, who, predictably, diverged in their conclusions.2 Some are forecasting huge gains. Some see much more modest growth. And others are predicting gains but only for certain stock sectors. Wisely, at least in this article, few of them are giving advice that seems concrete enough one might actually directly act upon it.
At the end of the year we’ll be able to look back at who was right and who was spectacularly wrong. But even then, the lucky guessers won’t be any more reliable than anyone else when they make their predictions again for 2020.
It’s important to remember that analysts don’t release these predictions because they’ve stumbled upon a foolproof way to make market forecasts. They make these prognostications because there’s a huge demand by the public wishing to know the future, even if it’s just what appears to be an educated guess. And the financial media are determined to deliver what their audience wants.
Why This All Feels So Familiar
The predictions the pundits and analysts are making this year can sound pretty convincing, especially when they give the reasoning behind them. At least until you go back and look at the forecasts from last year and the year before that.
In fact, the conditions Paul Farrell cited in his prediction of a 2016 crash are all still with us in one form or another. Maybe his 50% correction will happen three years late. Technically, anything is possible, though not all outcomes are equally probable.
Listening critically to this year’s market predictions, you may start to get a sense that you’ve heard it all before. That’s because you have. What they’re predicting for this year can probably be said about any year with equally predictive accuracy. If you collect enough varying predictions, hindsight will often make it seem like somebody who was purely guessing looks amazingly clairvoyant. Think of the winning lottery numbers as an example.
Since figuring out with certainty what the market will do at any given point in the future is impossible, the next best plan is to own an investment strategy that’s designed to endure a wide range of possibilities through broad portfolio diversification. Your trusted advisor can help you understand how maintaining a disciplined approach makes more sense than trying to predict the future.
Citations
2. https://www.newsweek.com/stock-market-predictions-2019-sp-fed-dow-trade-trump-nyse-nasdaq-1275903