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05 Feb Beware of Forecasters

Posted at 12:38h by Jay Hutchins 0 Comments

Every year, we hear from market prognosticators telling us where the market will be a year from now, the future direction of interest rates and when the economy will or won’t go into recession. But does anybody ever keep track of the accuracy of these forecasts?

A recent article cites a March 2017 study covering 6,627 market forecasts on the S&P 500 index, made by 68 forecasters who employed technical, fundamental and sentiment indicators, for the period 1998 through 2012. They found that the overall accuracy rate was 48%, just below the accuracy of a coin flip. Two-thirds of the forecasters had accuracy scores below 50%. The highest accuracy score was 78%; the lowest was 17%, and, when graphed, the distribution of the forecasting accuracy looked very much like the common bell curve, which one would expect from random processes. Loosely translated, the conclusion of the article was that there was no evidence whatsoever of forecasting skill.

So, why isn’t the media looking back at how well its gurus forecast the future? The article suggests that if they did, the game would be over, and the papers and financial media would have to stop running these tantalizing visions of the future—and probably lose viewers and readers. So, they continue to play a very cynical game.

The article then focuses upon financial writer and market analyst, John Mauldin, whose website states that he is privy to the smartest thinkers in the marketplace, screened and analyzed “by a team of ace analysts,” which “gives you the equivalent of direct access… to some of the brightest minds and most successful managers in the world today.” Mauldin finished 36th in the aforementioned study, just behind CNBC’s Jim Cramer, who was 37th. The article asks whether Mauldin’s published five-year forecasts, offered to his readers five years ago, would have given them an edge in their investment activities. 

Mauldin predicted a major slide in the Japanese yen to the U.S. dollar, which he said was “almost certain,” with a 90% probability. Actual result: the yen increased nine percentage points against the dollar. Mauldin predicted that Europe would experience a crisis at least as severe as the Brexit scare, with a run-up in interest rates and a sovereign debt scare in the peripheral countries—again a 90% probability. Actual result: the MSCI Europe Index returned about 5% a year over the past five years, and interest rates have stayed at historically low levels.

Mauldin also predicted that China would experience a “hard landing” or “recession”—a 70% probability—and then China would suffer a long period of Japanese-style stagnation—a 95% probability. Actual result: China’s GDP growth did slow somewhat, but where was the hard landing or period of stagnation?  Mauldin forecast a series of crises in emerging market countries, potentially setting off a Long-Term Capital Management-style global financial shock—an 80-90% probability. Actual result: no emerging market debt crisis.

Finally, Mauldin predicted a continuation of the secular bear market in U.S. stocks that began in 1999. The actual result was that the S&P 500 index provided a compound return of 11.7% over the five-year period, with a total return of about 74%.

If you needed it, this article will help you be skeptical of any experts, with their teams of researchers, who claim that they also have a crystal ball.

As a matter of fact, I have a crystal ball in my office. It was a tongue-in-cheek gift from a colleague some twenty or so years ago. You are welcome to come gaze into it anytime you like. 

Source:

https://www.advisorperspectives.com/articles/2020/01/06/accountability-proves-the-incompetence-of-market-forecasters

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