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WHO Are the Best Predictors of Stock Market Performance?

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Lon Jefferies

By Lon Jefferies MBA CFP®

WHO Are the Best Predictors of Stock Market Performance?

Every day CNBC airs dozens of “financial professionals” making market forecasts. Similarly, every financial publication has multiple pieces regarding the future of the stock market. With so much information, how is it possible to determine who is worth listening to and what information to incorporate into your investment strategy?

Dropping Names

Without dropping any names, I’d suggest that the more confident a market pundit is about his or her prediction, the more you should question their advice.

People who make strong, unwavering forecasts are interesting to watch and appear as intelligent, appealing leaders whose advice is worth following. Meanwhile, people who frequently say phrases such as “it depends,” “maybe,” or even “I don’t know” don’t seem to be adding much value and don’t appear to be any more knowledgeable than the average investor. Yet, I’d suggest you tune out the stanch forecaster pounding his fist on the table as he speaks and rather listen closely to the individual who is less willing to make firm predictions.

Stock market performance

Stock market performance is clearly not a result of any singular factor such as whether or not companies will generate more profits than expected. If this was the case, making market predictions would be easy – one could simply guess the answer to be yes or no and have a 50% chance of being correct. Rather, hitting profit targets is only point A on a long list of factors impacting stock market performance.

Point B may be whether or not the Federal Reserve will raise interest rates during their next meeting. Again, our market forecaster could guess yes or no to this question and have a 50% chance of being correct. However, when considering both factors A and B, now our market forecaster has to be right twice on two issues where there is only a 50% probability of being correct on each. Simple math tells us there is only a 25% chance that this will occur (50% x 50% = 25%).

Point C may be whether the republicans or the democrats win the 2016 election. Again, there is a 50% chance of either possibility. Now there are three factors in play, each with a 50% probability, so the probability that the market pundit will get all three factors correct is 12.5% (50% x 50% x 50% = 12.5%).

Point D may be whether the US dollars strengthens or weakens when compared to other currencies. Again, there is a 50% chance of getting this right, so when we consider all four factors, there is now a 6.25% chance of getting it right (50% x 50% x 50% x 50% = 6.25%).

The equation

There are hundreds of factors that go into this equation. Will Greece have another economic crisis? Will the price of oil go up or down? Will a war breakout with Russia? This is exactly why forecasting market performance is so difficult!

For this reason, the people who make the best forecasters are people who say phrases such as “perhaps,” “however,” and “on the other hand” a lot. Doing so illustrates that the individual has looked at the situation from a lot of different perspectives and realizes that everything may not go according to plan. These types of people also tend to admit when they are wrong more willingly and update their analysis utilizing the latest information available, even if the new information doesn’t reflect what they previously anticipated. Their thought process is likely: “I got point A wrong, so I need to adjust my thinking on point B, which will have an impact on point C, so how does this change my perspective on point D.” We’ll call this a point-A-to-point-B-to-point-C-to-point-D mentality.

By comparison, the forecaster who makes the strong prediction while staring into the camera likely utilizes more of a point-A-to-point-D mentality. They are less likely to admit that there are more factors affecting market performance than can be managed, and less likely to incorporate new information that doesn’t coincide with his previous prediction when making forward-looking forecasts. Their thought process is likely: “I may have gotten point A wrong, but that doesn’t matter. All that matters is point D and I believe I got that right when making my prediction.” This approach is obviously less logic-based than the approach taken by the forecaster who knows there are too many factors to enable an individual to make a confident prediction.

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Assessment

While people who make confident predictions regarding market performance are entertaining to watch and provide advice that is simple to follow (he said buy, so I’ll buy), their advice is not likely to be any more accurate than other market pundits. In fact, if they are unwilling to admit when they get any potential factor concerning market performance wrong, their advice may be more damaging then useful.  By comparison, market forecasters who utilize phrases such as “however,” “it is hard to say,” and “I’m not sure” provide advice that may come off as unhelpful or impossible to follow, but it is these people who provide logic-based nuggets of information that are likely to benefit your investment portfolio.

ABOUT

Lon Jefferies, a Certified Financial Planner™ (CFP), is a fee-only financial advisor and trusted fiduciary at Net Worth Advisory Group in Salt Lake City, Utah. He is dedicated to providing comprehensive financial planning and investment management on a fee-only basis.

Conclusion

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One Response

  1. First Quarter Market UPDATE: 2017

    U.S. stocks have recently backed down from highs reached following the U.S. presidential election. Stocks advanced more than 13% between Election Day and March 1st amid speculation that the new administration’s pro-growth agenda, including infrastructure spending, tax cuts, and regulatory reform, would rev up the economy. They have given back some of those gains since then, however, amid concerns about implementation of the agenda.

    While fiscal policies could boost growth at the margins, one outlook for the economy and the markets over the longer term remains guarded but not bearish. That’s due in part to stock valuations that are still high, but also to three structural forces that are likely to weigh on economic growth and interest rates: unfavorable demographics, technological disruption, and expanding globalization.

    These structural forces, which have been at work since the 1980s, will continue to be influential in the years ahead.

    How do they hold down growth and rates?

    In a lot of ways, but here are a few examples: As the developed world ages, its citizens are spending less and saving more. Technological advances are allowing many businesses to operate with less capital investment, and fierce global competition on the cost of goods and labor is keeping inflation down.

    And so, we encourage investors to look past short-term up or down movements in economic or market trends. Instead, it’s prudent to stay focused on the long term and stick to your investment plan if it’s well-tailored to your financial goals, time horizon, and risk tolerance.

    This focus should serve you well even if, as some economists are projecting, stock market returns over the next ten years prove to be a bit more modest than their historical average.

    Dr. David Marcinko MBA

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