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The folly of market predictions

For the best long-term predictions, predict that most predictions will be wrong

In a previous column, I mentioned less than half of predictions are accurate. This phenomenon has been well documented, yet market predictions continue to abound. I began making market predictions in my January 2016 newsletter, mostly to poke fun at the whole prediction process, but also to test myself against the experts. How have I done?

The back-drop to my first year making predictions came on the heels of a volatile and difficult 2015. The U.S. experienced a major correction, while Canada was in the grips of a resource-driven bear market. Pundits often base predictions on recent trends, and thus had very modest expectations for 2016. My predictions were bold. First, I predicted that most predictions would be wrong. This is my standard first prediction. I also predicted that the markets would return 20 to 25 per cent in 2016 and that the Canadian market would out-perform the U.S. This forecast was unheard of at the time, with oil and the Canadian market plummeting simultaneously.

By year-end my predictions had proven prescient, with the Canadian market up 20.2 per cent and the U.S. up 12.0 per cent. Those who believed the experts might have sat out this great year. The beginning of 2017 saw the experts once again expressing low expectations of zero to five per cent gains for the year. Once again, my predictions were bold, reiterating that most predictions would be wrong and calling for gains of 15 to 20 per cent. I also predicted that market returns would revert to their long-term trend of delivering about 10 per cent average annual gains. Between 2000 and 2015 market performance was only half the historical norm, leading many to suggest that 10 per cent returns were no longer achievable.

The 2017 market returns were an awesome 21.8 per cent in the US and a more modest but still respectable 8.3 per cent in Canada. While these gains fell outside my predicted range, they were superior to the expert’s forecasts.

The great market performance of 2017 drove the pundits to a more bullish 2018 stance, predicting gains in the range of seven to 10 per cent for the U.S. and four to five per cent in Canada. My crystal ball became cloudy. I again predicted that most predictions would be wrong but failed to predict how the market would perform, writing “I don’t have a clue,” with the exception of ruling out a collapse of greater than 12.5 per cent. This was my most cautious prediction of the three years. I also forecast significantly more volatility in 2018 than in 2017.

My synopsis turned out reasonably well, certainly better than bullish pundits. The U.S. market ended 2018 down 4.4 per cent, somewhat better than the Canadian 8.9 per cent decline Day-to-day volatility was high all year, especially in December.

And 2019? In my January 3 newsletter I wrote that expert predictions were all over the map. I think the root cause of the differing predictions was the pre-Christmas market plunge. One quote: “The S&P 500 will drop to 2900 (in 2019) from 3000 at the end of this year.” The prediction was made sometime before Christmas, when the writer was positive about the end to 2018 but negative on 2019. The S&P 500 closed 2018 at 2500. There was a 500-point difference between where this expert expected the S&P 500 to close 2018 and where it ended, demonstrating my point around the folly of predictions.

My 2019 predictions were again bold. I predicted most predictions will be wrong, for the markets to be up in excess of 12.5 per cent and for the Canadian market to beat the U.S. It’s too early to claim victory, but as of the date of writing, we are off to a good start.

Does my record mean I can confidently make accurate predictions? Absolutely not! I have a reasonable process but short-term market direction is unpredictable. Think long term, and avoid making bold moves based on bold predictions!

About the author

Contributor

During a 35+ year career in ag sales and management, Herman VanGenderen became an active investor and stock and real estate, building portfolios in both. His latest book is “Stocks for Fun and Profit: Adventures of an Amateur Investor.” Visit his website at www.you1stenterprises.com or email Herman at [email protected]

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