Why Wall Street Is Making Irrelevant Market Predictions Again

An annual ritual is under way at the major Wall Street investment houses: predicting exactly where the S&P 500 will finish the next calendar year.

- Jeff Sommer

This mission is impossible, but that hasn't stopped teams of well-trained strategists at august brokerages and investment banks such as Goldman Sachs, Bank of America and Morgan Stanley from focusing their analytical firepower on forecasting the future.

How wrong can these guesses be? Mr. Paul Hickey, a founder of Bespoke Investment Group, compared the yearly Wall Street predictions and actual market results starting with the forecast for Dec 31, 2000.

He found that the Wall Street consensus only ever predicted gains, every single year, of about 8.8 per cent on average. Of course, there were big losses some years, as well as larger-than-expected rallies in others, so the variance between actual annual performance and the prediction was huge—an average gap of 14.2 percentage points.

Being wrong by that much means that these forecasts weren't merely inaccurate. They were completely out of bounds.

The amazing thing, with a record like this, is that the strategists keep trying. I salute them for having the supreme self-confidence to stick with it.

I'm sure that I couldn't predict the future of the stock market either, and I wouldn't want to try. But if someone forced me to do it, my random guesses would include the possibility that in any given year, the stock market may fall. In fact, the S&P 500 declined in seven of the 25 calendar years in Mr. Hickey's tally.