Market Forecasts

This article was first published in the Globe and Mail on December 16, 2023. It is being republished with permission.

by Tom Bradley

Investment professionals are a confident lot. They have a view on everything. The words, “I don’t know” are not part of their vocabulary.

This trait is problematic for many reasons, but particularly when it comes to market forecasting.

This is the time of year when clients are asking what’s going to happen in 2024, and advisers and portfolio managers are all too willing to provide an answer.

It goes something like this: “The market is in an up/down trend and there’s lots/little cash around.” Or “Technical indicators are saying stocks have peaked/bottomed.” Or the most common answer, “The economy is strong/weak therefore the stock market will be strong/weak.”

The problem is that nobody knows what the market is going to do in the short to medium term. Nobody. Ever. It’s totally unpredictable. And yet, strategies are formulated, investment decisions made, and portfolios traded based on these meaningless views.

Consider what forecasters are up against. First, stock prices are influenced by a myriad of economic, political, and social factors, all of which weigh on the outcome at different times and to varying degrees. Some are in plain view, such as current hot buttons like inflation and AI, but most are playing out in the shadows, only appearing on the radar after they’ve had their effect.

There are always crosscurrents, despite what commentators lead us to believe. If an issue really is clear-cut, be assured the market has already adjusted to the new reality.

Not only do the known factors come and go, but new ones emerge for which there’s no historical context (think Brexit, COVID and ChatGPT). A well-reasoned forecast can quickly be sideswiped by something that wasn’t contemplated or even known.

Adding to the challenge is the fact that variables interact in unexpected ways. For every action, there’s a reaction. Too many economic and market forecasts focus on a few key factors but don’t go far enough in assessing the second-order affects.

Then there’s the biggie – human behaviour and emotion. Investor sentiment, how bearish or bullish investors are, is a prime reason why stocks are so volatile and short-term moves are impossible to model.

If previous years are any indication, 2024 forecasts for gains in the Canadian stock market will fall into the well-worn range of 7% to 9%. This might seem reasonable given the average annual return over the last 60 years is 9%, but the data suggests otherwise. Over those six decades, the annual market return fell within that range exactly five times. Yes, five out of 60. Meanwhile, it was in negative territory 16 times and up over 20% on 18 occasions.

You get the picture. There’s no accountability around market forecasts, and certainly no intellectual honesty. For every prediction that’s right, there are 10 that are way off.

So, why is this important? Well, to truly understand how investing works, you must accept that stock prices take a totally unpredictable path. When you do, it will have a profound effect on how you manage your portfolio, and in all likelihood, make it easier. Doug MacDonald, a pioneer in the financial planning community, once said to me, “it became much easier to do our job once we realized that nobody, including us, knows what is going to happen in the future.”

Here are some handy rules of thumb for short-term market forecasts.

Don’t try to time the stock market. Your portfolio will move up over time, with plenty of surges and dips along the way. You don’t know when they’ll come, so stay invested. An average 7% to 9% return over five, 10 or 20 years is what you care about, not one year.

Always be diversified. It’s a consequence of not knowing where things are going. You need to own a mix of assets that are driven by different economic factors, geographies, and currencies. If you’re properly diversified, you’ll never have everything working, or lagging, at the same time.

Put as many of your investment decisions on auto pilot as you can. Making automatic monthly contributions eliminates the temptation to market time and takes the emotion out of investing. Averaging in (or out) puts market forecasts in their proper place, a needless distraction.

And remember the wise words of John Kenneth Galbraith, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” Follow economists and strategists for perspective and education, maybe even entertainment, but not for making investment decisions.

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