What will markets do in 2025?
An annual ritual is underway at the major Wall Street investment houses: predicting exactly where the S&P 500 will finish the next calendar year. This mission is impossible — but that hasn’t stopped teams of well-trained strategists at august brokerages and investment banks like Goldman Sachs, Bank of America and Morgan Stanley from focusing their “analytical firepower” on forecasting the future.
How wrong can these guesses be?
Paul Hickey, a founder of Bespoke Investment Group, compared the yearly Wall Street predictions and actual market results starting with the forecast for December 31, 2000. He found that the Wall Street consensus only ever predicted gains, every single year, of about 8.8 percent on average. Of course, there were big losses in some years, as well as larger-than-expected rallies in others, so the variance between actual annual performance and the prediction was huge — an average gap of 14.2 percentage points.
Being wrong by that much means that these forecasts weren’t merely inaccurate. They were completely out of bounds.
I’m sure that I couldn’t predict the future of the stock market, either, and I wouldn’t want to try. But if someone forced me to do it, my random guesses would include the possibility that in any given year, the stock market may fall. In fact, the S&P 500 declined in seven of the 25 calendar years in Mr. Hickey’s tally.
Yes, markets can also go down
Yet in that period, the Wall Street consensus never predicted an annual stock market decline. Whatever the reason, a credulous investor expecting gains every year would have been disappointed: In the 12 months of 2022, for example, the S&P 500 fell 19.4 percent; in the recession year of 2008, it plummeted 38.5 percent.
Believers of doom missed out on the zoom
True, those were years when developments like spiking inflation and the financial crisis rocked the markets in ways that were difficult to predict, but the forecasts for the last two years failed to reflect reality, too, in a different way. After the terrible year of 2022, the strategists became more cautious. For 2023, the experts forecast a gain of 6.2 percent, but the market rose 24.2 percent. For the current calendar year, the consensus prediction was that the S&P 500 would rise only 3 percent, yet by Friday, the stock market was already up more than 24 percent. If you had lightened your stock market holdings in response to the strategists’ predictions since the end of 2022, you would have missed out on a tremendous rally.
That brings us to 2025
After failing to anticipate the soaring stock market, the strategists are more optimistic than usual now, predicting a price gain of 9.6 percent for the next calendar year. That number doesn’t include dividends, which would lift the total return of the S&P 500 above 11 percent.
I’d be delighted with that result. But given all those previous misses, the strategists’ belated optimism gives me no comfort and little information. I don’t have a crystal ball, but I see plenty of reasons for both optimism and pessimism about the markets.
Where the market, the economy and the country are heading are critically important questions. But I don’t have good answers. Instead, I’ve concluded that it would be wise to disregard all current rose-tinted claims to omniscience, and will continue to invest cautiously, based on history and long-term probabilities.
It’s hard to avoid the annual stock market forecasts. So, enjoy them as the fortune-telling fantasies they have become, and keep them apart from your real investing life.
What do we say at WPS?
We agree with Jeff. Instead of trying to guess which way markets can go we rather advocate maintaining a diversified position which focusses on your investment horizon, personal goals, risk profile and needs.
And if you are feeling any disquiet or want to discuss your portfolio with us, please get in touch and we can have a chat.
The original article can be found on the New York Times website here.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.