Wall St. loves to guess, but no one knows what the market will do in 2024

Wall Street is issuing forecasts for the stock market’s performance through 2024.

Don’t worry about paying them.

The predictions are usually wrong, and if they are right, it is only by accident.

Take a look at their predictions for 2023. At the end of 2022, strategists predicted that the S&P 500 would end 2023 at 4,078 points, a gain of 6.2 percent from its starting point, according to Bloomberg data.

The market is currently above 4,700, a gain of more than 22 percent. These predictions were undoubtedly so far off because 2022 was a truly terrible year for stocks – and one that most analysts had not anticipated at all. So the forecasts for 2023 were unusually modest and reflected the gloom that prevailed when they were made.

According to the median forecast on December 19, the S&P 500 would end the year 2024 at 4,750 points, according to Bloomberg. The projections are still shifting – and will certainly increase as the market continues to rise. When the market rises, forecasts usually rise as well.

These predictions are not scientific, and I only bother to address them because they receive enormous attention and form the basis of the advice given to thousands and perhaps millions of people.

If you find them entertaining or otherwise enlightening, great. Enjoy them.

But at all costs, don’t take them at face value, because there is no evidence that anyone can reliably predict the movements of the market, and there is a lot of evidence that buying and selling stocks based on your beliefs about the upcoming movements of the market is unacceptable. a foolish game.

It’s better to invest with humility: accept that no one knows where the market is going from moment to moment, and still focus on the long term.

The big picture

For many decades, the entire global stock market has been on an upward trend, and as long as capitalism survives and companies continue to profit, the stock market as a whole is likely to rise. But that will certainly not always be the case. If you’ve been in the market at all, you know it rises and falls. These movements are, for the most part, unpredictable.

Yet Wall Street strategists make predictions anyway, despite a track record that is wildly incompetent.

In 2020, based on data collected by Paul Hickey, founder of Bespoke Investment Group, I discovered that Wall Street had regularly gotten the market direction wrong since 2000. At my request, Mr. Hickey updated the information.

The figures show that between 2000 and 2023, the average Wall Street analyst predicted that the S&P 500 would rise an average of 9 percent per year. In reality, the annual increase averaged 6 percent.

Even these numbers underestimate the extent of failure.

For example, in 2018 the market fell 6.9 percent even though forecasters said it would rise 7.5 percent, a difference of 14.4 percentage points. In 2002, the forecast predicted a 12.5 percent increase, but shares fell 23.3 percent, a margin of almost 36 percentage points.

And in 2022, the forecast expected an annual increase of 3.9 percent. But the stock market lost 19.4 percent. The forecasters were wrong by a margin of more than 23 percentage points.

Taking into account these types of gaps, the average Wall Street forecast from 2000 through 2023 missed its target by an average of 13.8 percentage points per year – more than double the stock market’s actual average annual performance.

The situation now

Many Wall Street strategists are astute analysts of what has already happened. But the economy and markets are constantly changing, in unexpected ways. Reliably predicting stock market averages twelve months in advance is impossible for anyone.

Declining inflation combined with a robust labor market has led many people to believe that the Federal Reserve will soon cut the short-term interest rates it directly controls. This is seen as bullish for the stock market, which has been rising in recent months. The S&P 500 is on the verge of surpassing its last January peak. And if there isn’t a recession in the next year and interest rates fall, it’s reasonable to think the market will continue to rise.

That’s the bullish case in a nutshell. But it’s also easy to think of bearish alternatives.

For example, if the Fed cuts interest rates prematurely, inflation could rise sharply. The central bank may then have to raise interest rates again, as Paul A. Volcker, the former chairman of the Fed, had to do in 1981. second recession in two years.

A “soft landing” for the economy in 2024 could be on the way. But so can a recession.

David Rosenberg, a veteran strategist and economist, is still predicting one, as he has been doing since early 2022. He expects the economy to falter, interest rates to fall and stocks to fall. “Treasuries, not the stock market, will be the best-performing asset class in 2024,” he told me in an interview.

Given the complexity of the world and all the crises, big and small, that are already apparent, it would take a very long column to outline all the things that could go wrong with a prediction about next year. And I am sure that there will be major shifts that few people can imagine.

Fortunately, you don’t need to know these things to be a successful investor.

The key is to set aside enough money to pay the bills in the first place, because investing involves risk, and you don’t want to take risks with money you absolutely need. Then, to minimize your risks in holding stocks, you decide to invest in the entire market for decades through low-cost, diversified index funds and avoid any attempt to time the market. Wall Street’s predictions can tempt you to buy and sell at the wrong times. It is safer to ignore these predictions completely.

Shares are only part of the program. I also invest in high quality bonds and do so in the same way, with broad, low-cost index funds. Investment grade bonds, especially government bonds, tend to provide a cushion when stocks fall (although that wasn’t the case in 2022). Government bonds in particular are safe investments, despite the budget pressures resulting from the US government’s inability to reach consensus on spending and tax policies in recent years.

I find these forecasting exercises fascinating and sometimes learn a lot from them, but I don’t expect them to provide a roadmap to the future.

Hope for the best, prepare for the worst and get on with life. Unfortunately, Wall Street’s predictions won’t help that.