Making Sense of Market Forecasts

Most prognosticators miss the mark—but there are ways you can profit from their predictions.

By JASON ZWEIG

Every January, hordes of highly paid experts attempt to predict what the economy and the markets will do in the coming year. Later in the year, nearly all of the forecasts turn out to be wrong.

Here, we hope to offer something different: a blueprint for how to make practical use of these predictions, even when you suspect they are wrong. Taken together, forecasts can point toward the best and worst outcomes you can reasonably expect in a given year—and tell you how confident you should (or shouldn’t) be.

Forecasting is as old as markets themselves. Records from ancient Mesopotamia, according to research by historian Alice Louise Slotsky, are full of references to omens that were believed to predict commodity prices, such as “the raven is for a steady market.”

Practically ever since, pundits have been pumping out forecasts—and missing the mark. Think back over the past year, when technical indicators called the “Hindenburg omen” and the “death cross” were said to predict that stocks would collapse, China’s stock market was expected to keep booming and a “double dip” recession in the U.S. looked likely to many market experts. So far, at least, none of those things has happened.

If the forecasters are right for this year, then U.S. stocks will go up roughly 10%, 10-year Treasury yields will run around 3%, inflation will be a bit under 2%, and the economy will expand 3% or so. Yet it would be naïve to think you could bet accordingly.

Why do people with years of experience, massive expertise and mountains of data at their disposal so often get the future wrong?

First and foremost, the future is the realm of surprises; no one, no matter how expert, can reliably foresee what will happen and how people will react to it. As the economist Friedrich von Hayek said in his lecture “The Pretence of Knowledge” when he won the 1974 Nobel prize in economics, “in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.”

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One Response to Making Sense of Market Forecasts

  1. james moylan says:

    I have a web site where I give investment advise on penny stocks and stocks under five dollars. I have many years of experience with these type of stocks. If theirs anyone thats interested in these type of stocks you can check out my web site by just clicking my name. I would like to comment about market forecasting. I do not believe that you can make short term forecasts about the direction of the stock market. Long term forecasts are a different matter. The market generally has a decline of 20% or more every three or four years. With this being the case one should exercise caution when the market has been in bull mode for several years.

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