W.I.T. #46 - The Reality of Economist Predictions
Near the beginning of every year the smartest minds in the financial world give their predictions for the upcoming year. The reliability of those predictions, however, leaves a lot to be desired.
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Snowball the Dancing Cockatoo – I’m not one to scroll through animal videos, but this one is strangely appealing.
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VIDEO TRANSCRIPT
John Scherer:
The holidays bring talk about economist predictions and stock market returns. That's what I'm thinking about as we get in here to the holiday season. Start looking at the calendar turning towards 2024. A lot of the talk in our world is about what's going to happen in the markets next year, what's happened this year, etc. And, and that on our mind here at Trinity Financial Planning as well. And recently one of the mutual fund companies we do some investing with, Avantis investors, had sent over a packet, a big packet of information on all their funds, et cetera. And they had a couple of really interesting pieces that made me think about this at this time of the year, I wanted to share here. We'll put a link to the entire packet in the show notes here. John: But check out this graphic about what this talks about is predictions for the market that's in those dark or those light blue lines there. And then what actually happened that year in the orange lines. And you can see some wide disparities in the notes up above. It talks about how this is the consensus estimate, right? So the median over a lot of different strategists. And remember, these are some of the smartest folks in the financial industry, right? These aren't dummies throwing darts at a board. These are really smart folks. And look at how far they're off on a consistent basis with both off on the positive and negative by 20 plus percent in some years, right? And you think about that, the stock market returns something like 9% on average. And I think the average, it says across there, of how far they're off is about 18%. John: So they're off by a magnitude of 200% what the market returns historically. I mean, think about that. And these are super smart folks. The other thing that caught my eye in here is check out those blue bars, right? The estimates the last six years, the predictions for the S and P 500, not one of them negative. And of course, we've had two negative years in the last six. So interesting how that works. And just goes back as some reinforcement of this idea that, hey, we all want to know what do you think is going to happen next year and when the best and brightest just are so far off they can't make these predictions. It's interesting to think about, interesting to look at, but does not have a lot of value for us as we think about how we should act, what we should do with our own personal finances. John: And then later in this packet, let me just grab this one other page for you here. Let's take a look it's on page 15. I thought this was really interesting. We've talked about this before, but just reinforces. So each of these graphs, the left hand side, the turquoise is us stocks. The middle one is foreign stocks, developed countries. And the green is emerging markets. Top row there, the large company stocks, how they've done. John: Bottom row of each of these graphs, small company stocks and then value. Left growth, right? Look at us stocks over there on the left hand side. On the right box there is year to date things through November, large cap growth, what, 35 plus percent? I mean huge growth. Look in the opposite corner, those small company value stocks, pretty meager returns. And over time we expect large companies will outperform or excuse me, small companies will outperform large companies and value will outperform growth. But in any one year, it's a very different story. Take a look at developed markets there in the middle, right? Still that angio small value compared to large growth. But in the foreign countries, companies this past year, large cap value has actually outperformed growth. John: Right. Just a very different story. And go over on the right hand side, we have emerging markets in everybody's portfolio. A very different story there, right? Those small value stocks have significantly outperformed and gives us a little insight into the background of why we diversify the way we do, how it works, and why our portfolios don't look like the S and P 500 every year, but in a good way. So that's what I'm thinking about today. As always, interesting in knowing what you're thinking about. If you're watching this on YouTube, shoot a comment in the comment box or drop me an email directly. And as always, thanks for watching.
John Scherer CFP® is a fee-only certified financial planner based in Middleton, Wisconsin. John has over 20 years of experience advising clients on personal tax, investment, and financial planning. You can reach him by email at john@trinfin.com.