Market predictions as financial porn

David Peartree, BridgeTower Media Newswires

Financial columnist Jane Bryant Quinn famously coined the phrase “financial porn” to describe much of the content produced by the financial press. She was referring to the stories and other items in the financial press designed to “tickle our prurient financial interest” as opposed to being in our long-term financial interest.

Some financial porn is hard-core, making it easier to spot. The hard-core stuff is designed to make investors act impulsively.  Examples include articles like “The #1 Stock to Buy Now,” “The Great Crash Ahead: Strategies for a World Turning Upside Down,” or “Never be on the wrong side of the markets again,” a piece about a proprietary marketing timing system. All are obvious sales pitches even if they appear in the form of a news article or commentary.

Market predictions are more like soft-core financial porn. They appear in serious, highly respected publications like The Wall Street Journal and Barron’s. This patina of journalistic reporting creates an aura of credibility. The story reads less like a forecast and more like news.

Early in January 2017, The Wall Street Journal published an article exclaiming, “This May Be the Start of Something Really Big.” The article reported on the post-election market rally and noted that many strategists believe the uptick in bullish sentiment since the election will push stock prices higher.

Two weeks later, The Wall Street Journal deflated those expectations with another article stating, “One Stat That Shows a Trump Bull Market is Unlikely.” This story downplayed the likelihood of further market gains by noting the historically high value of the U.S. stock market compared to gross domestic product.

The second story amounted to an emphatic “never mind” to the earlier suggestion of a big market rally. But that’s the way with market forecasts — easy come, easy go. Rely on them at your peril.

Financial author Larry Swedroe has for the last seven years reviewed and scored the accuracy of “consensus” market forecasts. Consensus predictions for 2016 called for U.S. economic growth to accelerate, for the Federal Reserve to continue to raise interest rates, and for U.S. small cap stocks to underperform large cap stocks.

All three missed the mark. U.S. economic growth slowed from 2.6% in 2015 to 1.9% in 2016 but it was, nonetheless, a good year for U.S. stocks. Interest rates did not play out as expected. The Fed took no action on interest rates throughout the year, until December when it raised the target range for the federal funds rate from 0.50% to 0.75%. Bonds had a very strong year until the election when the post-election stock rally took hold and bonds lost some ground. Small cap stocks countered expectations by posting about twice the return of large cap stocks.

As it happened, none of the predictions were in any way useful for investors. Two of these were also failed predictions in 2015. Interest rates were supposed to rise and economic growth was supposed to take off, but neither happened.

Naturally, there were successful predictions but not enough to instill any confidence. Over the seven years he has been tracking this, Swedroe estimates that only 28% of the consensus forecasts that he tracks panned out.

A UK-based investment firm called Intertrader hosts a website called “Gurudex” that tracks market recommendations from 16 major investment banking firms. The site tracks the banks’ buy and sell recommendations for stocks. For 2015, Gurudex concluded that the aggregate stock picks of the major banks were less accurate than a coin toss. Only 43% of the recommendations produced a gain for the year and the average portfolio loss was 4.8%, a return that significantly underperformed the S&P 500 Index, which gained 1.38% that year.

There is no shortage of other examples of unreliable market calls. Since at least 2010 we have been hearing of the coming sell-off in the bond market. Investors have been warned to unload their bonds or, at the very least, re-shape their bond portfolios into short-term positions.

In 2013, 45 out of 46 economists surveyed by The Wall Street Journal forecast higher interest rates in 2014. The 46th predicted no change. The implication was that the bond market was turning and that bond prices would fall. As it happened, they were all wrong. Rates fell, bond prices rose, and total returns were decent.

We have read recommendations about how to position a portfolio for the implosion of Greece, and then the Brexit vote. In August 2016, UBS warned of a major market crash within the next two months.

We read that the likelihood of a Trump presidency was a laughable improbability. Then, from the same people who did not see it coming, we read about how a Trump presidency will take down the markets, and then when the markets did not tank, we read about how to reposition a portfolio for a Trump administration.

Warren Buffett finds little value in market forecasts. “Short-term forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

Market forecasts are part of the noise of daily financial news, but acting on those forecasts is unlikely to make you a more successful investor. Quite the opposite.

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David Peartree, JD, CFP is the principal of Worth Considering, Inc., a registered investment advisor offering fee-only investment and financial advice to individuals and families.  he can be reached at david@worthconsidering.com.

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