By J. William G. Chettle, EVP, Loring Ward
The New York Post headline the day after the 2016 U.S. elections put it best: “Pundits, Polls, Politicians, the Press: EVERYONE WAS WRONG.”
From the U.S. elections to Brexit to economic doomsaying, 2016 saw a series of spectacularly erroneous predictions. Again and again, experts were proven wrong and had to scramble to explain why they had missed the mark so badly.
The year began with calamitous predictions from the economists at the Royal Bank of Scotland who said that 2016 would be a “cataclysmic year,” with stock markets falling as much as 20%. The bank told investors to, “Sell everything except high quality bonds…”
But the Scots were not the only doom and gloom outliers. In January of 2016, market guru Michael Pento predicted similar declines: “The S&P 500 falls more than 20 percent as it finally succumbs to the incipient global recession.” He also thought the dollar would slide precipitously (it didn’t).
Others were even more pessimistic. James Dale Davidson, an investor and economist who correctly predicted the market downturns of 1999 and 2007 warned: “…a 50-percent correction in the stock market is actually a conservative estimate. If the market drops to its 2009 lows, we’ll actually see a 70-percent correction….Real estate will plummet over 40 percent, savings accounts will lose 30 percent of their value, and unemployment will triple.”
Personal finance author Robert Kiyosaki predicted that the world would see the worst stock market crash in history in 2016: “We’re on the edge of a cliff right now. We have never been here before.”
Back in 2015, Marketwatch columnist Paul Farrell was already seeing disaster ahead: “It’s time to start the countdown to the crash of 2016. No, this is not a prediction of a minor correction. Plan on a 50% crash.”
Even those who should have known better joined in. Lawrence H. Summers, director of the National Economic Council for President Obama, worried in January that volatility in the Chinese market might presage global financial disaster: “Because of China’s scale, its potential volatility and the limited room for conventional monetary maneuvers, the global risk to domestic economic performance in the United States, Europe and many emerging markets is as great as any time I can remember.”
Several actual end-of-the-world predictions also failed to materialize. Some claimed that scholars had incorrectly interpreted the Mayan calendar as showing the world would end in 2012. The “correct date” was actually June 3 – 4, 2016.
And a viral video from the YouTube channel “End Time Prophecies” predicted that the world would end on July 29 with a “polar flip” and worldwide “megaquake.”
But not all the experts were catastrophe mongering. Some were just mildly pessimistic. David Kostin, chief U.S. stock strategist at Goldman Sachs, called for a replay of 2015 this year, “Flat is the new up,” with the S&P remaining essentially unchanged for the year. And according to the New York Times, the consensus on Wall Street was that the S&P 500 would rise 7 percent in 2016.1 As of December 14, the S&P closed up 12.60% year-to-date.
The same New York Times article notes that since 2000, the Wall Street consensus “…has called for an average yearly increase in the S&P 500 of about 9.5%. The actual average annual change was less than 4%, however, and consensus predictions were inaccurate in every single year, sometimes by preposterous margins. In 2001, for example, the consensus called for a gain of 20.7%. But the index fell by 13%. In the horrible year of 2008, the consensus was that the market would rise 11.1%. As many investors may recall, it fell by 38.5%. Not once since 2000 has Wall Street predicted that the market would decline in a calendar year. Yet the market actually fell in five of those years.”2
As Professor Meir Statman has recently noted, while experts failed to predict the outcomes of major political events such as Brexit and the U.S. elections, they also missed the mark on the economic impact of these political surprises. In both cases, predictions were dire, reality not so much. In fact, British markets have rebounded substantially from their post-Brexit lows and the Dow hit all-time highs in early December.
Why are experts wrong so often? In part, it is the pressure to stand out and get attention. After all, how often do you see a headline proclaiming: “Experts agree that markets will perform normally next year.” But the larger challenge is the sheer unknowability of the future. And even if we know something will happen, we can never be sure exactly how markets and economies will react when it occurs. This helps explain one of the largest, and for many investors the most consequential, predictive failure: the inability of most active managers to reliably predict how markets and stocks will perform over time.
In fact, over the last 10 years (through June of 2016), 85.36% of large-cap managers, 91.27% of mid-cap managers and 90.75% of small-cap managers underperformed their respective benchmarks.3 Identifying those few outperforming managers ahead of time has proven next to impossible, especially since many outperformers are unable to maintain their winning track records over time.
Instead of trying to predict the future and invest accordingly, most investors would be better off buying and holding a globally-diversified portfolio and letting the long-term growth potential of markets help grow their wealth. It isn’t exciting or headline-grabbing, but over time this approach has made a real difference for many patient, educated investors.
When it comes to predictions, perhaps we should follow the example of The Leipzig Zoo’s “oracle koala” Oobi-Ooob. The zoo had big hopes that Oobi-Ooob. could help predict the outcomes of Germany’s soccer matches in Euro 2016. But he failed utterly and completely. So the zoo fired him…
“As a fair loser he is now leaving the predictions to others. He sees his strengths in eating eucalyptus”, said a zookeeper at the Leipzig Zoo.
3SPIVA® U.S. Scorecard Mid-Year 2016