As we near the finish line for 2023, the number of notable economic data releases and other market-moving events will wane. With airtime to fill, the financial media will increasingly look to 2024 for content. A tried-and-true approach to accomplish this is to interview research analysts, economists, and market strategists about what they think will happen in the stock market during the coming year. 

I don’t blame the media for pumping out this type of content. There is a healthy demand for it. Investors hate uncertainty. A market forecast provides a roadmap for the coming journey. Even if the forecast points to a tough road ahead, just having that knowledge can provide investors comfort and a sense that they are in control of their own destiny. To actually add value, however, a forecast must accurately reflect how the future will unfold. So, are market forecasts accurate?

The chart below, recently published by Avantis Investors, can help to answer the question. It illustrates the consensus forecast for the S&P 500 relative to the actual return each year going back to 2018. The result of the comparison does not inspire confidence. The average gap between the forecast and actual returns across the periods was a whopping 16.8%.

YTD 2023 ranks as the most accurate period. Through November, the estimate is ‘only’ missing the mark by about 12%. Had these market strategists abandoned their attempts at forecasting and simply used the long-term historical return for the S&P 500 of 10.1% instead, they would have improved the overall accuracy of their estimates. The average gap between forecast and actual returns would have declined slightly from 16.8% to 16.1%!

While the median estimates have widely missed the mark, there is typically a small handful that gets a market call correct each year. This is not surprising, given the large number of individuals attempting a guess. The problem is that there is no consistency from one year to the next for who is getting the call correct. Therefore, you can’t tell whose view you should pay attention to. 

Despite their abysmal track record, the individuals making these forecasts are intelligent people. Many work for the big Wall Street banks, investment managers, and research firms. They are highly educated, highly paid, and have tremendous resources at their disposal. They are extremely knowledgeable about the markets and the economy. They (usually) make sound, logical arguments supported by good data and analysis. Importantly, they are good storytellers, painting visions of the future that sound highly plausible. It’s not surprising that their forecasts continue to garner so much attention. It may be fiction, but it can still be entertaining.

At the end of the day, forecasting is doomed to fail because the markets and the economy are too large and too complex to accurately model. Nobody interviewed by CNBC, Bloomberg, The Wall Street Journal, or any other media outlet in 2023 knows what is going to happen in 2024. There's nothing wrong with consuming that content; just don’t let it influence your investment decisions.

Week in Review

• The November CPI data released today showed that prices rose .1% from the prior month and 3.1% from a year earlier, a slight decrease from the prior month’s 3.2%. Core CPI, which excludes food and energy prices, rose 4% from a year earlier, the same year-over-year growth rate that was seen in October. Price increases in goods, specifically durable goods such as cars, appliances, and furniture, have slowed recently as many retailers have begun to cut prices for these items. Price increases for services, on the other hand, have cooled less than goods as demand for services continues to be strong.
• The October Job Openings and Labor Turnover Survey (JOLTS) report released last Tuesday, 12/5/2023, highlighted that job openings in October declined by 617,000 from the prior month to a total of 8.73 million, the lowest amount of job openings since March of 2021. The survey showed that the biggest declines were seen in health services, with job openings falling by 238,000, followed by “financial activities” with 217,000 fewer job openings than the month prior.
• With all S&P 500 companies having reported their Q3 earnings, the actual year-over-year Q3 earnings growth for the S&P 500 was 4.9%, beating the estimate of -.3%. Analyst estimates for Q4 2023 year-over-year earnings growth have lowered from the 8.1% estimate released on September 30th to 2.7% now, as nine sectors of the S&P 500 have lowered their EPS estimates for Q4.

Hot Reads

Markets

• Inflation Slowed to a 3.1% Annual Rate in November (CNBC)
• Jerome Powell’s Inflation Fight Is Succeeding, Raising Questions About Rate Cuts (WSJ)
• U.S. Payrolls Rose 199,000 in November, Unemployment Rate Falls to 3.7% (CNBC)

Investing

• Should You T-Bill and Chill (MorningStar)
• What Happens After a 20% Up Year in the Stock Market (Ben Carlson)

Other

• Tesla Cybertruck Driven – Top Gear (YouTube)
• The Math for Buying a Home No Longer Works. These Charts Show You Why (WSJ)
• Coffee Lovers, It’s Time To Stop Using K-Cups (Wired)

Markets at a Glance

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Economic Calendar

Source: MarketWatch

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