AROUND THE TURN of the year, investment experts issue their forecasts for the next 12 months. Bloomberg says it has gathered more than 500 market predictions for 2023, with many forecasting a rough year for the financial markets.
I’ve done my research as well, and I’m now prepared to offer my forecast: There’s an 80% chance that the S&P 500 will return between -10% and 30% in 2023.
I can’t claim this as original work. It’s the recommended forecast for every year by researchers who have studied market predictions—and found them to be reliably wrong. They compared 13,300 market forecasts from chief financial officers of major corporations with the stock market’s subsequent return.
“The conclusion was straightforward: financial officers of large corporations had no clue about the short-term future of the stock market,” wrote psychologist Daniel Kahneman in Thinking Fast and Slow. “When they said the market would go down, it was slightly more likely than not that it would go up.”
It’s not just CFOs who get these things wrong. The accuracy of experts’ predictions in general is little better than chance, according to groundbreaking research by psychologist Philip Tetlock. Indeed, Bloomberg’s recent story acknowledges that “humility is the order of the day for prognosticators who largely failed to predict the 2022 cost-of-living crisis and double-digit market losses.”
Forecasters tend to fall into two traps. First, experts are “astonishingly overconfident” in their predictive powers. The witty economist John Kenneth Galbraith summarized the problem this way: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
The second trap is a form of present bias, which in this instance is the belief that current conditions will continue into the future. This year’s crop of predictions, for example, is mostly gloomy, a continuation of 2022’s trend. Any big positive surprises will tend to derail them.
A wiser course is to simply rely on market history: 80% of the time, the stock market’s annual return has been between -10% and 30%. This helps us escape present bias, but it’s also too broad a range to build an active investment strategy on.
Which is the main point: Because no one knows what the future holds, it would be folly to change your investment program based on anyone’s forecast. Including mine.