When the Crystal Ball is a Little Cloudy

We’re pleased to share insights from Dimensional: When the Crystal Ball is a Little Cloudy.

This is a fun time of year. The new year has begun and everyone is catching up on holiday stories. The Ashes have just wrapped up, with a stunning victory for the Aussies (or so my colleagues “down under” keep telling me). And a new round of equity analysts’ forecasts for the stock market’s future have arrived. If previous forecasts are any indicator, you might want to use these for entertainment only.

Bloomberg provides year-end price return predictions for the S&P 500 Index of US stocks sourced from a number of equity analysts. The gap between the forecasts and actual index returns over the past several years has been consistently vast. The most accurate forecaster averaged an 18.6% absolute difference between prediction and reality. Many of the individual yearly predictions were well over 20% off the mark.

This is not to poke fun at market analysts but rather to highlight the challenge of predicting where markets will go. Market prices reflect an expected return demanded by market participants based on current expectations of the future. But actual returns include an unexpected component driven by future events that are by definition unknowable today. It’s best to view these forecasts as entertainment. Or ignore them and get back to watching the cricket.

Exhibit 1

Absolute Difference Between Equity Analyst Forecasts and Actual S&P Index Calendar-Year Price Returns

Past performance is no guarantee of future results. Actual returns may be lower.

Glossary

Expected return: An estimate of average anticipated returns informed by historical data.

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Simon

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