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An Escalator Of Optimism

Submitted by Salil Mehta via Statistical Ideas blog,

The current stock market level is disconcertingly well below not just the Wall Street forecasts for 2016 (made a couple months ago), but also below those made for 2015... or for even 2014!  One can see our recently tabulated list (the lengthiest available ever) of market calls, which was recently enjoyed by leaders such as billionaire Vinod Khosla, and economist Noah Smith.  One doesn't need a Harvard PhD to grasp the chart below for 10 Wall Street soothsayers, consistently giving their views to Barron's (and anyone else) in each of the past few years.

 

Even as we proved the flagrantly poor performance of these "forecasters" (not just relative to the market but -depressingly- even relative to a fair coin toss), it's worth noting that the recent stock market level of just <1900 is below all 10 out of 10 2016 forecasts (e.g., Federated is the highest at 2500, or we would need a 32% rise in just 11 months remaining in 2016 to make that target!)  It is also below all 10 out of 10 2014 forecasts (e.g., Federated is again the highest at 2100, or we would need an 11% rise to make that 2014 target.)  In a period of increased suicides among economically stressed men (here, here), let's not push bogus hope.

As for the most bull of bullish forecasters, it is intriguing that 5 of the 10 forecasters have always had and an upper-half forecast in each of the past 3 years.  They are sequenced here in approximate order of bullishness (most bullish first): Federated Investors, J.P. Morgan, Prudential, Bank of America, and Columbia.  It seems as if these most imaginative firms have much to learn about their prognostication errors and risk.

Assuming they will throw in the towel and bring their buoyant forecasts back to norm, this is not the first time strategists have done so quickly in the New Year.  Even as recently as 2014, we analyzed how year-end forecasts have ineptly come down in the first-month, even as their unknowing outlooks are disproportionately subject to final-month risk.  We will publish an article in an external publication later in February, concerning ideas about what investors can do now, given this wild gap, between optimism and intelligence.