Every year, I look with some amazement at the annual forecasts from the major financial institutions—particularly the expected returns that sit squarely near the long-term average. You can be almost certain these predictions won’t materialize.
Basing market forecasts on the long-term average return is a remarkably poor “crystal ball” strategy. The average return almost never happens. You’re much better off being a perpetual optimist. But even if you’re known as a perma-bear, that garners more respect than those who rely on average predictions.
Since 1927, the (back-calculated) average annual return of the S&P500 Index has been 7.9 percent. From this perspective, a forecast of, say, between 5 percent and 10 percent might not seem unreasonable. However, if you delve into the underlying data, you’ll quickly see that this assumption is flawed.
In the 96 calendar years since 1927, the return on the S&P500 Index has fallen within that range only six times. You read that correctly: six times. And that’s not changing any time soon, as the S&P500 Index is currently trading over 25 percent higher than it started. This means that as a market “guru”, your chances of being right with that “ignorant” 5-percent-to-10-percent forecast were only about 6 percent. That’s not great.
Go for extremes
A much better strategy would have been to consistently predict that stocks would rise by at least 20 percent every year. In that case, you’d have been right 28 times, a hit ratio of 29 percent. Yes, if you had been “crazy” enough to project annual returns of 20 percent or more, you’d have been correct nearly one in three years—five times as often as a prediction of between 5 percent and 10 percent.
Even if you had played the perma-bear role every year, you wouldn’t have fared worse than the average forecasters. Since 1927, the Dow has dropped by 20 percent or more six times. Because it takes significantly more courage to make such a “career-limiting” prediction year after year, I also respect perma-bears more than the average forecasters.
Again, a lack of historical awareness
This year is no different. The average return forecast from 24 gurus at the biggest investment banks is, unsurprisingly, 7.4 percent. That’s almost perfectly aligned with the long-term average. Eleven of the 24 forecasters even predicted returns between 5 percent and 10 percent. That’s nearly half of all participants, and there’s a 94 percent chance they’ll be wrong.
Just as troubling: not one of these so-called market gurus dared to predict a return of more than 20 percent. Yet based on historical data, the likelihood of this happening is 29 percent. You’d think that among 24 predictions, there’d be a few who actually looked at the historical distribution of returns. Apparently not.
This year, however, there is one forecaster predicting a negative return of 20 percent or more. BCA believes the S&P500 Index will fall by over 25 percent in 2025. You can see the effect immediately: BCA gets named in my column, while I gladly skip over the many grey mice among the other forecasters.
I personally think the odds of seeing another 20-percent-plus gain are higher than a major drop like that, but respect to BCA for making such a bold prediction. The fact that no one, despite such compelling statistics, is willing to bet on a return of 20 percent or more is shocking. Not only should you ignore such forecasts, but arguably, you should disregard the big banks behind them as well.
Jeroen Blokland analyses striking, current charts on financial markets and macroeconomics in his newsletter The Market Routine. He also manages the Blokland Smart Multi-Asset Fund, which invests in stocks, gold, and bitcoin.