Every year, right before January 1, we are treated to the latest round of economic predictions for the coming year, published by the experts at large investment banks and brokerage firms. Issued in confident language, usually with plenty of statistics cited as backup, these forecasts from intelligent people with advanced degrees and access to loads of data might lead us to believe that the predictions are accurate—perhaps even inevitable.
But when you look back on some of these confident, informed predictions, you start to notice a bit of a gap between what was forecast and what actually happened in the subsequent year. Take, for example, the J.P. Morgan 2022 Market Outlook, published December 15, 2021. According to the prognosticators at Morgan, a bright future was in store for investors in 2022, “with expectations of further equity market upside and above-potential growth.” The report assured readers that according to the brokerage firm’s economists, earnings growth would be better than expected, and the US economy was due for “a strong cyclical recovery… within a backdrop of still-easy monetary policy.” The last part of that sentence certainly didn’t age well, since, as we now know, the Federal Reserve has raised its Fed funds rate fairly dramatically four times this year: 0.50% on May 5, and 0.75% on June 16, July 27, and September 21.
Morgan’s optimistic predictions also included an above-average 3.7% GDP growth rate for the US in 2022 (we are actually on track for negative growth overall for the year), and “market upside” for stocks. The report predicts that the S&P 500 will reach 5,050 by the end of the year (it is at roughly 3,500 currently), with 20+% returns. Of course, as most of us know by now, the markets are actually down more than 20% across the board.
Lest one get the impression that J. P. Morgan was the only player in left field, consider the Merrill Lynch investment outlook published at the end of 2021, entitled “The Great New Dawn.” Among other things, Merrill’s economic team predicted “above-trend’ economic growth” and a “budding equity culture” that would drive “the secular bull market for years to come.” US stocks, Merrill customers were told in the report, would provide “a combination of growth, quality, and yield characteristics. Profit margins,” the report continues, “should also remain elevated for US equities.” The report concluded that “the macroeconomic backdrop should remain supportive of equities.”
Around the same time as these reports were coming out, the forecasters at Citigroup published their “Outlook 2022” white paper, entitled “The Expansion Will Endure: Seeking Sustained Returns.” The brokerage firm’s breezy report predicted “continuing economic growth” and “moderating inflation.” (Oops.) Later, in a slight elaboration, readers are told that “global GDP growth will be solid,” and “inflation is likely to retreat to tolerable levels in 2022.” We know now that interest rates have exploded this year, which makes it interesting, in retrospect, to read Citi’s prediction that “interest rates will remain low or negative.” Given the market downturn in 2022, one might raise an eyebrow to read Citigroup’s conclusive advice: “We believe the world economy and equity markets have not peaked and have room to grow.”
None of these economic teams—all peopled by some of the most talented, well-informed experts in the land—foresaw a nasty bear market decline in US and global markets, the dramatic rise in interest rates, or the economic slowdown we are experiencing now. What should this tell the average investor? Should we fire all the analysts and start making investment decisions with a dartboard or by flipping coins?
No. What we should take from this is that, first of all, predicting market movements is a very uncertain business, and even the brightest people with the best information in the world frequently make wrong guesses about what’s going to happen in the future. Second, we should remember that the investors who tend to fare best in the long haul are those who, rather than trying to predict the future, stick to what they can control: proper diversification, systematic rebalancing, and the discipline of a long-term strategy.
At Empyrion Wealth Management, we want clients to be well-informed, and we also want them to understand how to allow the market to work for, rather than against them. to learn more, click here to read our white paper, “The Informed Investor.”
Stay Diversified, Stay YOUR Course!