If there was ever a year that we were reminded of the difficulty of making stock market predictions, it was 2020. Yet, many investors continue to search for "expert" market outlooks in hopes of positioning their portfolio to outperform. While it's tough to fault anyone for failing to predict that we would experience a global health pandemic that would send shock waves across markets, it goes to show that an investment approach based on discipline and diversification rather than prediction and timing is perhaps the better route to take.
To exemplify the difficulty of making market forecasts, we can look in the rear-view mirror at several examples of 2020 market forecasts and see how they turned out. A well-known financial publication surveyed 10 Wall Street strategists to gather their outlook1, below are a few takeaways:
The consensus of the strategists was that the S&P 500 would rise 4.1% in 2020, a substantial difference from the 18.4% that the index returned, despite all the headwinds faced. Even the panel’s most bullish member undershot where the S&P 500 would end up, estimating the index would rise to 3500 by year end.
The strategists predicted that the 10-Year Treasury would end the year yielding 1.89%, a number more than double the 0.919%2 that we saw on December 31st.
The strategists also didn’t expect the Fed to lower the federal funds rate to the level where it sits today, a target of 0% – 0.25%. The lowest range any strategist put on the rate was 1.25% - 1.50%.
From a sector standpoint, 8/10 strategists were overweight financials going into 2020; the financial sector ended up being one of four sectors that experienced losses in 2020. Only two of the strategists were overweight in the technology sector which ended up being the best performing sector. On the contrary, only one member of the panel was underweight energy, the sector that saw the lowest returns for the year.
What happened once COVID-19 threw a wrench into many forecasts? The New York Times Jeff Sommer writes that many doubled down, “In April, the Bloomberg survey showed, forecasters predicted that the S&P 500 wouldn’t rise at all for this calendar year: They said the market would fall about 11 percent.” In a year that was characterized by sharp swings for stocks, those who paid attention to those market forecasts may have made regretful decisions. While the dramatic downturn was swift and steep, with the S&P 500 falling 33.79% from peak to trough, the recovery would be just as quick, as the index followed that up with its best 50-day period in history3 and returned 70.18% from March 24th through year end.4
It would be biased to highlight the inaccurate forecasts for this bizarre year if the record in the past had been impressive, but that isn’t the case. Year in and year out, economists across the industry give their outlook for the upcoming year, and when we reflect back on these forecasts, they turn out to be about as accurate as a weatherman that calls for rain in the desert. Success in the market doesn’t require making accurate predictions, it requires the ability to stay in the game. An investor who is able to stay disciplined with their investment plan that their advisor set out for them, will be better off than one who constantly makes decisions based on “expert” market forecasts.
1 Nicholas Jasinski, “Barrons 2020 Outlook: Stocks are Headed Higher. Here’s Which Sectors Will Benefit the Most”, Barron’s, December 16, 2019
3 Pippa Stevens, “This is the greatest 50-day rally in the history of the S&P 500”, CNBC, June 4, 2020
4 Source: Morningstar