Tis the Season for Prognostications – Buyer Beware
It’s that time of year again, when prognosticators – the so-called “experts” in a given field – take stock and give us insight into what we should expect in the coming year. In the financial realm, banks, research firms and even some fund managers are offering up economic forecasts that they stand behind with great fanfare. While it is worthwhile to try to think about the future, how much faith should we really put in these forecasts? Looking back to what the experts were saying at the beginning of 2015, the answer seems to be not much.
Let’s start with energy, a market that has been hammered this year as the price of Brent crude oil slid from $57 at the end of last year to $38 yesterday. Coming off of 2014, when oil had already fallen over 40% from the year before, economists predicted a recovery in 2015. Based on data from Consensus Economics, the mean forecast of 60 energy analysts was for oil to be trading at $75 by September 2015. In fact, no one even came close to reality. The lowest forecast in the survey called for $50 oil! The consensus also called for a rise in the prices of metals, which did not pan out as global metals declined across virtually every sub sector.
Moving on to interest rates, at the beginning of 2015 the economy seemed on track for recovery and there was consensus around rates starting to tick up midway through the year. A survey of economists from Consensus Economics had the UK official bank rate at 0.82% by September and the 10 year Gilt yield at 2.7% by December, well above the 1.9% where it stands today. In fact, for years forecasters have been predicting that the flood of money from QE would drive rates up. Given that rate predictions influence everything from pension funding to business planning, that was a pretty big miss.
How about the stock market? Despite high global stock valuations coming on the heels of three years of positive market returns, investing pros surveyed by CNNMoney expected equity markets to produce high single digit returns this year. In fact, the FTSE 100 is down nearly 7% year-to-date. Investment experts recommended favoring the US market over Europe, where there was greater uncertainty. As it turned out, with the EU finally embracing QE, Europe was the one bright spot amidst a lackluster global market. The MSCI Europe is up roughly 4% for the year, outpacing the FTSE 100 by over 1000 bps.
Certainly one could go on and on about the many things that did not turn out as predicted over the course of the past year. Does that mean that prognostications are useless? Not necessarily – even establishing a general sense of the future can help investors think through allocation decisions. It is important, however, to be wary of people who are dogmatic in their predictions. No one has a crystal ball. The only prediction we might make for next year is that things will turn out differently than predicted.
For further reading, and a good laugh, check out the 12 worst predictions ever made.
Source for Index returns: Bloomberg. All returns are from January 1, 2015 through December 16, 2015. The FTSE 100 return is Sterling and the MSCI Europe return is in Euro.