Forecast Early and Often

Wall Street Journal columnist Jason Zweig recently wrote of a truism that is rarely acknowledged within the investment industry: Wall Street market forecasts offer little to no value.

As evidence, Zweig points to the recently-published research of Philip Tetlock, a psychologist and professor of management at the University of Pennsylvania’s Wharton School. In a study detailed in Superforecasting: The Art and Science of Prediction, Tetlock found that amateurs were, on average, better forecasters than paid professionals. In fact, the top 2% of amateurs, those Tetlock called “superforecasters,” were about 30% more accurate than the experts. According to Tetlock, “What you think is much less important than how you think.” Curiosity, self-reflection, and an appetite for new information are all attributes of the best forecasters. As economist Edgar R. Fiedler once said, “If you have to forecast, forecast often.”

While it may be a fruitless exercise, hearing the prognostications of acknowledged market experts remains a guilty pleasure of many investment professionals, which may explain why nearly 1,000 of them turned out last week for CFA Society Toronto’s 58th Annual Forecast Dinner. To its credit, CFA Society Toronto does hold its forecasters accountable by revisiting the past year’s predictions. As might be expected, the results are typically a combination of hits and misses. Most investors ascribe little value to Wall Street forecasts, but their usefulness as marketing tools means they’re here to stay.

Economist John Mauldin, author of the popular Thoughts from the Frontline newsletter, headlined this year’s event in Toronto, and he kicked off his presentation by poking fun at the art of forecasting, quipping, “Making a forecast with a decimal number is laughable. More laughable is a Chinese GDP number, posted on the last day of the quarter and never revised.” Staying on the subject of China, Mauldin noted that the country is in the midst of a shift from a manufacturing-based economy to one driven by service industries. Corruption remains a problem and China will have to rid itself (or at least minimize) the forces of crony capitalism to join its more developed peers. Absent a policy error, Mauldin sees no hard landing for China, though he reminded the audience that part of being a more modern economy is being subject to the vagaries of the business cycle and that a recession is inevitable. Interestingly, in a poll of the audience, 71% considered a potential hard landing in China to be a greater risk to global growth than the possibility of a European recession.

Mauldin considers Europe to be a “hopeless case,” in part because of the influx of immigrants and refugees from Syria and elsewhere in the Middle East that will strain government budgets that are already stretched thin. While there may be pockets of success over the next year, he considers near-term prospects for the continent to be “muddle through at best.”

His outlook for the United States isn’t much rosier. Mauldin foresees 1.5%–2% growth over the next year, noting that even a small shock could push the US economy into a recession. Further, he warned that the United States is “headed into the next crisis more leveraged than we’ve ever been with no monetary bullets.”

With equity valuations extended and earnings headed lower, Mauldin fears that there’s a “bull market in complacency.” He anticipates a 20% drop for US stocks in the next year and, channeling GMO’s Jeremy Grantham, sees seven lean years ahead for equity investors.

Where does an investor hide? Mauldin thinks the bull market in bonds is not yet over and expects the 30-year US Treasury bond yield to approach 2%. And in a nod to the local audience, he suggested that when the next recession does hit and capital is looking for a home, “Canada will be one of the places people feel safe about.”

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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