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Before reading the year-ahead market forecasts that will undoubtedly be coming across your desk in coming weeks, go back and read last year’s forecasts.
Doing this will save you in two ways: You’ll save the time you’d otherwise spend reading this year’s offerings, but more importantly you’ll avoid the losses you most likely would otherwise suffer when betting on forecasts that are no better than a coin flip.
I recently reviewed the year-ahead forecasts I received at the end of 2022. I know that economics is the dismal science, but the exercise I went through was particularly depressing. Consider the following predictions, each from a well-known Wall Street analyst:
-
The S&P 500 will lose 17.9% in 2023. Year to date (through Nov. 20), the S&P 500
SPX
has gained 18.4%. - A recession in the U.S. will begin in the first quarter of 2023. Real GDP in the U.S. actually rose at an annualized rate of 2.0% in the first quarter, another 2.1% in the second quarter, and 4.9% in the third quarter.
-
Bonds will outperform stocks in the first half of 2023. Just the opposite, in fact. In contrast to the SPDR S&P 500 ETF’s
SPY
first-half gain of 16.8%, intermediate-term Treasurys gained 1.3% and long-term Treasurys gained 4.4% (as judged by the Vanguard Intermediate Treasury ETF
VGIT
and the Vanguard Long-Term Treasury ETF
VGLT
). - The equal-weight S&P 500 will outperform the cap-weighted version, at least in the first half and maybe for the full year. This couldn’t be further from the truth. The cap-weighted S&P 500 this year has outperformed the equal-weight by one of its largest margins ever: as of June 30, the year-to-date margin was 9.9 percentage points. As of Nov. 20, it was 15.3 percentage points.
This is just a sample of last year’s forecasts, and not all of them proved to be as off-base as those noted here. As a group, however, they weren’t significantly better than a coin flip.
The futility of macro forecasting
This shouldn’t come as a surprise, according to Howard Marks, co-founder and co-chairman of Oaktree Capital Management. Marks has argued for years that it’s mostly, if not completely, impossible to forecast the macroeconomy. In a year-ago essay, entitled “The Illusion of Knowledge,” Marks laid out his reasons for being skeptical of macroeconomic forecasting, and I urge you to read it in its entirety. In a nutshell, he argues that forecasting is next to impossible because:
- Consumers have feelings, and they don’t always react in the same way to otherwise identical events. Marks quotes physicist Richard Feynman, who once said, “Imagine how much harder physics would be if electrons had feelings.”
- Much of what’s happening right now is historically unique. So there are no precedents that forecasters can point to in predicting how the markets will react. Marks asks: “How can a model of an economy be comprehensive enough to deal with things that haven’t been seen before?”
- Macroeconomic forecasting relies on circular reasoning. Says Marks: “To predict the overall performance of the economy, we need to make assumptions about, for example, consumer behavior. But to predict consumer behavior, don’t we need to make assumptions regarding the overall economic environment?”
For proof, Marks points to the dismal performance of macro hedge funds. These hedge funds analyze macroeconomic data to predict macro (i.e. large scale) geopolitical and economic events. The table below is an updated version of what appears in Marks’ essay. The hedge fund data are from HFR.
| HFRI Hedge Fund Index | HFRI Macro (Total) Index | S&P 500 Total Return Index | |
| 5-year annualized return | 5.30% | 5.53% | 11.01% |
| 10-year annualized return | 4.20% | 3.19% | 11.18% |
As Marks writes, “The average hedge fund woefully underperformed the S&P 500 in the period under study, and the average macro fund did considerably worse… Given that investors continue to entrust roughly $4.5 trillion of capital to hedge funds, they must deliver some benefit other than returns, but it’s not obvious what that could be. This seems to be especially true for the macro funds.”
The bottom line? You shouldn’t base your financial plan on specific macro predictions about the economy and geopolitical developments. Far better to have a plan that specifies in advance how you will react to different situations.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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Plus: Why wealthy investors put $125 billion into this new type of private-equity fund last year
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