Wall Street firms strive to hire the best and brightest. But the best and brightest don’t have a clear read on the future.
Consistently pinpointing where the stock market will land in 12 months is almost impossible. Look no further than the 2023 consensus forecast among analysts. According to Bloomberg, forecasters, on average, expected the S&P 500 Index would register a decline of about 2% this year, the first projected decline of the 21st century.
Over the longer term, stocks have a strong track record, but the long-term upward march isn’t a straight line. We expect downturns. Since 1999, the S&P 500 Index (excluding re-invested dividends) has finished lower seven times, according to data from Macrotrends. However, the weakness is usually short-lived.
What went “wrong” this year
“Usually, recessions sneak up on us. CEOs never talk about recessions,” economist Mark Zandi of Moody’s Analytics said in late 2022.
“Now it seems CEOs are falling over themselves to say we’re falling into a recession. … Every person on TV says recession. Every economist says recession. I’ve never seen anything like it,” he added.
Market weakness was predicated on a 2023 recession. Without a recession, a stiff headwind to stocks never materialized. The sharpest rise in interest rates in decades has yet to put the brakes on the consumer. Many people were able to secure low interest rates before the Federal Reserve started taking measures to curb inflation.
While estimates vary, some people still have funds from the stimulus payments they received in 2020 and 2021. Put another way, changing consumer behavior and government cash made traditional forecasting models less accurate.
If models are not updated to account for new variables and shifts in behavior, forecasters, who are already at a disadvantage, come under even greater pressure. In other words, complex data in, garbage out.
Barring an unforeseen collapse in the final three weeks of the year, the absence of a recession, fewer rate hikes this year, the general belief the Fed’s rate-hike cycle may be over, and an AI-related surge in big tech stocks fueled an impressive gain in the S&P 500 Index. The Dow Jones return, and the indices tied to dividend producing companies have been muted this year.
Strategists should not be completely ignored. They bring unique insights and observations to our attention. We are better informed because of their hard work. They really are brilliant individuals.
But they grapple with the unknown, which can make forecasting difficult at best. However, the unknown encourages us to get comfortable with risk. It allows us to become better and more disciplined investors.
A disciplined investor avoids taking shortcuts and remains focused on their long-term goals in the midst of short term uncertainty.
I trust you have found this review to be informative. If you have any inquiries or wish to discuss any concerns, please do not hesitate to contact me or any team member.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.