Market prognosticators are an optimistic bunch

[NW-Bound]

Last night surfin' the Web, I ran across an article that I wanted to share, but waited until this morning. Now, I cannot find it except there's a copy on the NY Times and it is behind a paywall. How was I able to read it last night?

Anyway, the gist of the article is that predictions are worthless, and that one is better off practicing indexing and buy-and-hold. OK, nothing earth-shaking here. What caught my eyes was that someone compiled the predictions made by pundits since 2000, and here is what he found.

1) The median prediction is for the market to rise every year. The market did that only 70% of the times.

2) The median prediction calls for an average of almost 10% market rise each year. Since 2000, it has been only 5.5%.


Item 1 is nothing unexpected. Item 2 is what I wanted to share, that is optimists outnumber pessimists.

PS. Hmmm... Thinking more about that 5.5%, that may be the arithmetic average. Perhaps the geometric average is higher, and the data compiler does not use it. Additionally, they are talking about just the price increase and not the total return which includes the dividend.

 

[OldShooter]

... Item 2 is what I wanted to share, that is optimists outnumber pessimists.

I think that is the expected result.

The DOL says that about 950,000 people work in the investment industry. Probably this doesn't include the hangers-on like Motley Fool, Barrons, or the ubiquitous peddlers of newsletters and advice. The livelihood of almost all of these people depends on the optimism of investors. Also, these people are drinking the Kool-Aid every day. So why would the predictions be anything but optimistic?

I tell the students in my Adult-Ed investment classes to avoid reading any of this stuff. It is all random nonsense. (IMO Jason Zweig is the only exception to this rule.)

 

[NW-Bound]

The market return since 2000 up to this point is about 7.2%/yr compounded, and that includes the dividend. Without dividend, the price increase of the S&P is 4.9%/yr.

I wonder how he got the 5.5%/year.

 

[Chuckanut]

I recall Louis Rukeyser interviewing his father Merryle (a professor of Economics and noted financial journalist) on one show. IIRC, his father opined that neither financial prognosticators or politicians had much long term effect on the American stock market. Nobody knows the future, and people adjust to whatever the politicians do.

Jonathan Clements is the only financial writer/advisor I think is worth reading these days. There are probably a few others, but I don't know them all.

 

[NW-Bound]

The reason I find it surprising that optimists outnumber the pessimists is that many in the financial marketplace sell "alternative investments". They would not want to say stocks will do well.

Additionally, even the stock pushers may not want to say that the market will return 10%, because many investors will say that it will be good enough for them, and they do not need active investments to steer their portfolio out of trouble.

 

[dtbach]

To all these prognosticators:


"Nobody knows nothin'"

 

[jollystomper]

The reason I find it surprising that optimists outnumber the pessimists is that many in the financial marketplace sell "alternative investments". They would not want to say stocks will do well.

Additionally, even the stock pushers may not want to say that the market will return 10%, because many investors will say that it will be good enough for them, and they do not need active investments to steer their portfolio out of trouble.

The "alternative investments", in my view, is mainly an attempt to market and differentiate themselves from the competition within the financial market. If all they said was "all you need is stocks", then all one would need to do is to find the cheapest "provider" of access to the market.

I also believe they feed on the desire many people have who want the near-instant gratification of hitting a home run vs. being happy with singles over time. Is it not that stocks will not do well, but it will take more time, don't you want something that will give you a more "instant" higher return? That is how things are sold. Not too different from people more easily led to buy lottery tickets than invest that money into the market.

 

[dixonge]

Last night surfin' the Web, I ran across an article that I wanted to share, but waited until this morning. Now, I cannot find it except there's a copy on the NY Times and it is behind a paywall. How was I able to read it last night?

It's here:

Forget Stock Market Forecasts. They're Less Than Worthless

I read it by creating a new account, clicking 'no' on a few things, then was able to go to the Business section and find it. I agree, nothing earth-shattering there, but maybe enough to fire up a bit of LTBH vs market timing holy war? hahaha

 

[N02L84ER]

I have a spreadsheet that has been tracking the S&P 500 since 1950. I added a calculation of # years with annual increases ignoring dividends in three different ranges. This is what I got.


# Years Range Percentage
23 > 17% 33.3%
24 2% - 17% 34.8%
22 < 2% 31.9%


ETA:
#Years: 23, Range: >17%, Percentage: 33.3%
#Years: 24, Range: 2% - 17%, Percentage: 34.8%
#Years: 22, Range: <2%, Percentage: 31.9%

 

[DrRoy]

The usual prediction is for an average year's rise, say 8-12%. In reality, an average rise is unusual. The market either under or over performs that 80-90% of the time. I saw an article on this recently but do not have the exact figures.

 

[NW-Bound]

... I agree, nothing earth-shattering there, but maybe enough to fire up a bit of LTBH vs market timing holy war? hahaha

Oh please, do not say war! People are already bashing one another over the head over religion, politics, races, toilet paper over or under, Atkins diet or plant-based diet, etc... We do not need to add killing a guy over how he invests his own money.

I have a spreadsheet that has been tracking the S&P 500 since 1950. I added a calculation of # years with annual increases ignoring dividends in three different ranges. This is what I got.


# Years Range Percentage
23 > 17% 33.3%
24 2% - 17% 34.8%
22 < 2% 31.9%

ETA:
#Years: 23, Range: >17%, Percentage: 33.3%
#Years: 24, Range: 2% - 17%, Percentage: 34.8%
#Years: 22, Range: <2%, Percentage: 31.9%

The usual prediction is for an average year's rise, say 8-12%. In reality, an average rise is unusual. The market either under or over performs that 80-90% of the time. I saw an article on this recently but do not have the exact figures.

What history shows is then, the market spends as much time at the two extremes as it does in the middle. The long-term return however is bounded by the P/E, which itself is limited by the growth of the economy.

You would think that following a superb year, the chance of a 2nd superb year is less. Yet, good years tend to bunch together. Most remarkable was the period of 1995/1996/1997/1998/1999. See Dow Jones annual returns below.

1995: 33.45%
1996: 26.01%
1997: 22.64%
1998: 16.01%
1999: 25.22%

Compounded: 200% or 3x after 5 years.

Bad years also bunched together. See DJ returns below.

2000: -6.168%
2001: -7.104%
2002: -16.763%

Because of the bunching, market prediction is harder because the reversion may take a few years to occur. One needs to look at secular trends of the underlying economy, but economists are fooled all the time too.

 

[HadEnuff]

the remarkable thing is how, after the sh!t hits the fan, the Bulls will claim they were right, citing some small phrase of caution lying in the midst of 7 paragraphs of unbridled enthusiasm.

 

[NW-Bound]

Even though market forecasters as a group are too bullish, one does better to listen to them than to the bears.

PS. I hasten to add: "as long as you do not sell the farm and put the proceeds into the market, or go on margin to buy stocks".

 

[UnrealizedPotential]

I find this interesting. It is a quote from Sam Zell earlier this year but I think it is still very valid.


"Isn't the real problem that pundits like you and me and her haven't been right about anything?" he asked, referring to the guests on the CNBC panel. We sit here and predict that it's gonna be this , it's gonna be that, and we're worried about this and we're worried about that, and meanwhile the game keeps going.

 

[pb4uski]

....2) The median prediction calls for an average of almost 10% market rise each year. Since 2000, it has been only 5.5%.

Item 2 is what I wanted to share, that is optimists outnumber pessimists.

PS. Hmmm... Thinking more about that 5.5%, that may be the arithmetic average. Perhaps the geometric average is higher, and the data compiler does not use it. Additionally, they are talking about just the price increase and not the total return which includes the dividend.

I think it has been more than 5.5% since 2000. Below is from Portfolio Visualizer.... VTSAX as a proxy for the market... since 2000. CAGR is 7.24% so positive years have to average higher than that to offset losses.... I get the average positive return is 16.16%... overall average is 8.86%.

Year	Inflation	Portfolio 1 Return	Portfolio 1 Balance	Vanguard Total Stock Mkt Idx Adm (VTSAX)
Annual returns for the configured portfolios
2001	1.55%	-10.89%	$8,911	-10.89%
2002	2.38%	-20.95%	$7,044	-20.95%
2003	1.88%	31.42%	$9,257	31.42%
2004	3.26%	12.61%	$10,425	12.61%
2005	3.42%	6.09%	$11,059	6.09%
2006	2.54%	15.63%	$12,787	15.63%
2007	4.08%	5.57%	$13,499	5.57%
2008	0.09%	-36.99%	$8,506	-36.99%
2009	2.72%	28.83%	$10,958	28.83%
2010	1.50%	17.26%	$12,849	17.26%
2011	2.96%	1.08%	$12,988	1.08%
2012	1.74%	16.38%	$15,116	16.38%
2013	1.50%	33.52%	$20,184	33.52%
2014	0.76%	12.56%	$22,718	12.56%
2015	0.73%	0.39%	$22,806	0.39%
2016	2.07%	12.66%	$25,694	12.66%
2017	2.11%	21.17%	$31,134	21.17%
2018	1.91%	-5.17%	$29,524	-5.17%
2019	2.38%	27.16%	$37,544	27.16%

 

[NW-Bound]

First of all, I need to retract what I said wrong in the first post. The CAGR is always less than the average return (proof left to the reader). I claim temporary senility when writing the reverse.

The results painstakingly entered by pb4uski do not include the year 2000, because the inception date of VTSAX is after Jan 2000. Using VFINX as a replacement (S&P500 instead of whole market), I get -9.06% as the return of that year.

As mentioned earlier, the positive years tend to bunch together. Same with the negative years. When the latter happens, the result is devastating. Let's look at what happened from Jan 2000 to Jan 2003.

In the above period of 3 years, if you invested $10,000 in VFINX on 1/1/2000, you would have $6,229 on 1/1/2003. If that does not look bad enough, let's put the cumulative inflation of 7.49% on top of it. Your money on 1/1/2003 would be worth only $5,795. That's a staggering 42% loss.

The above effect is not easily discerned from the big table that pb4uski posted. After this tremendous loss, the market got hit again with the Great Recession of 2008-2009, hence the 2000-2010 period is called the "Lost Decade".

I guess I need to keep reminding myself of this, to set my own expectation. I will always hold stocks, but will not count on the market to keep giving me more money than I can spend.

 

[HFWR]

Well then...

The stock market has never been this big relative to the economy https://www.cnbc.com/2020/01/14/the...are|com.apple.UIKit.activity.CopyToPasteboard