Give the stock-market experts a miss

Markets often behave contrary to the predictions of economists and analysts

“In a few months, I expect to see the stock market much higher than today.”

You might have heard the above line on one of the business news channels just this morning. That’s how common it has become, although the speaker may be forgiven for not understanding its historical importance enough.

The sentence was famously uttered by Irving Fisher, a famous American economist and a professor at the Yale University, just 14 days before the Wall Street crashed on October 29, 1929, the infamous “Black Tuesday.”

Fisher was not the only one who got it wrong around then. The Harvard Economic Society, too, had ruled out the chances of a depression. But, as is well known, the US saw what is now known as the Great Depression following the stock market crash.
“Stock market crashes are often unforeseen for most people, especially economists,” writes Didier Sornette in his book Why Stock Markets Crash – Critical Events in Complex Financial Systems.

Just before the stock market crashed in January this year, a stock brokerage firm had even predicted the Sensex hitting 25,000 by the year-end. While there is no ruling it out completely, such an event does appear highly improbable under the present circumstances.

And why do economists and other experts get their forecasts wrong? “A financial collapse has never happened when things looked bad,” writes Sornette. “On the contrary, macroeconomic flows look good before crashes.”

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