“The only function of economic forecasting is to make astrology look respectable.”
Economist John Maynard Keynes (1883-1946)
Where are we going? To the problem with optimism.
We can start with some predictions. Yesterday the S&P 500 closed at 2262.53. According to 10 investing experts, a year from now the S&P will be higher:
But the experts always tend to predict higher numbers. Looking back, a Wall Street statistician reminds us that the S&P moved lower during five of the past 16 years. During none of those years did the consensus predict the drop.
Between 1997 and now, the down years were 2000-2002, 2008 and 2015:
You know that a stopped clock has the right time twice every 24 hours. Similarly, the experts who said “up” every year could have been correct 73% of the time. However, when the S&P declined for the year, only 3 strategists made the right call. When the index rose, 101 could say they were correct:
And here are the specific margins of error. The blue indicates the forecasters; the red is the actual change:
The statistician’s conclusion? We are better off with a coin toss.
Our Bottom Line: State Pension Funds
I am concerned with pension plans. When municipalities invest their employees’ pension fund money, retirees expect the return to equal what they were promised. Echoing our Barron’s numbers, those promises depend on the experts’ predictions. And like Barron’s, it has not worked out.
The darkest blue, my own state of New Jersey, has one of the most underfunded pension funds:
My sources and more: Slightly nerdy but excellent, Statistical Ideas was my starting (and ending) point for the math behind stock market predictions. But in the middle, I did look at Barron’s and for state pension data, the S&P Global Ratings are at nasra.org. For better clarity, the end of this post was slightly edited after it was published.