Tis the Season of Forecasts

Every December we get inundated with forecasts for the following year. These forecasts range from expected GDP and interest rates to stock market performance.

Markets are Unpredictable

We are naturally attracted to forecasts because they aim to tell us what is going to happen. They often are supported by persuasive reasoning and statistical analysis. After listening to a confident and persuasive forecast we may be inclined to make changes to our investment strategies to align with that forecast. But here lies the mental deception. While forecasts appear to reduce future uncertainty, that is only an illusion because the markets are simply unpredictable.

Over the past 20 years, when polling economists and market strategists as a group to come up with a consensus forecast, not once did they forecast the stock market would be down the following year. Yet, in that time we experienced 6 negative years. But that is not all. Experts predicted several recessions that never occurred and have been predicting a bubble for the last several years.

When it comes to forecasting the market and economy, it’s not so much about someone’s experience or knowledge, it’s about the predictability of the event. The market is impossible to predict because the future is uncertain. Unexpected events, our responses to world events, and randomness make accurately forecasting the markets an impossible task. No one can do it consistently.

More is better than one

Not all forecasts need be ignored. Some are better than others. Forecasts that offer a large range of potential outcomes can be helpful in setting our expectations for the future. Creating a vision of what is possible in the future is much more beneficial for our planning and decision-making than a specific forecast. Remember, the more specific the forecast, the more likely it will be wrong.

I read and review many forecasts that are published. I look forward to sharing with you in the coming weeks my thoughts along with productive expectations and perspectives to help us have a great 2022, no matter what the markets may do.

 

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