2023 Forecasting Follies
It’s the time of year when we look back at most of the major banks to test their forecasting abilities for the coming year. What did they think in December 2022 for 2023, and what really happened? These forecasts get a lot of attention in the news and investment strategies are often developed based on these outlooks. But, are they really worthy of use for your investment strategy?
We’ve been tracking the economic forecasts of major banks for several years and comparing them to the actual performance of the S&P 500. Before you react to the new 2024 forecasts, let’s look back at previous years’ outlooks to see just how reliable (or unreliable) these one-year forecasts really are.
How did the 2023 Economic Forecasts Fare?
The S&P 500 closed 2023 at 4770, up 24% on the year. That’s quite a recovery from 2022, which was down over 20% and the worst year since 2008. In contrast, the average S&P 500 forecast only predicted a 6% growth through the year. The average market forecast was 14.5% lower than actual results! This continues a trend of big misses.
We have been tracking these various S&P500 Index forecasts for fun since 2017. Here is how our sampling of banks have done over that period:
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|---|
| Actual Close | 2674 | 2486 | 3221 | 3749 | 4766 | 3840 | 4770 |
| Average Forecast | 2372 | 2851 | 2912 | 3306 | 4058 | 4954 | 4077 |
| "Miss" | -11.3% | +14.7% | -9.6% | -11.8% | -23.1% | 29.0% | -14.5% |
That’s an average annual miss of 16.1% over the last 7 years! And here are the last 3 years by banks in our sample:
| Investment Bank | 2021 Forecast | 2021 "Miss" | 2022 Forecast | 2022 "Miss" | 2023 Forecast | 2023 "Miss" |
|---|---|---|---|---|---|---|
| Actual | 4766 | - | 3840 | - | 4770 | - |
| Average | 4058 | -14.9% | 4954 | 29.0% | 4077 | -14.5% |
| Bank of America | 3800 | -20.3% | 4600 | 19.8% | 4000 | -16.1% |
| Barclays | 4000 | -16.1% | 4800 | 25.0% | 3675 | -23.0% |
| BMO | 4200 | -11.9% | 5300 | 38.0% | 4300 | -9.9% |
| Citigroup | 3800 | -20.3% | 4900 | 27.6% | 3900 | -18.2% |
| Credit Suisse | 4050 | -15.0% | 5000 | 30.2% | 4050 | -15.1% |
| Deutsche Bank | 3950 | -17.1% | 5000 | 30.2% | 4500 | -5.7% |
| Evercore ISI | 4110 | -13.8% | 5100 | 32.8% | 4150 | -13.0% |
| Goldman Sachs | 4300 | -9.8% | 5100 | 32.8% | 4000 | -16.1% |
| J.P.Morgan | 4400 | -7.7% | 5050 | 31.5% | 4200 | -11.9% |
| Jefferies | 4200 | -11.9% | 5000 | 30.2% | 4200 | -11.9% |
| Morgan Stanley | 3900 | -18.2% | 4400 | 14.6% | 3900 | -18.2% |
| RBC | 4100 | -14.0% | 5050 | 31.5% | 4100 | -14.0% |
| UBS | 4100 | -14.0% | 4850 | 26.3% | 3900 | -18.2% |
| Wells Fargo | 3900 | -18.2% | 5200 | 35.4% | 4200 | -11.9% |
Some highlights (or “lowlights”) from this table:
Not one analyst was high on their prediction – all were low. In 2022, all the banks were too high.
The closest in 2023 was Deutsche Bank who still missed by 5.7%! (Before you get too confident in DB, they missed by over 30% the previous year!)
Barclay’s forecast was the furthest and missed by 23%! This is compared to their 2022 forecast being 25% off from the actual close – so “some” improvement.
We’ve already recorded the forecasts for 2024, and will revisit after next year.
How to Respond to Annual Forecasts
First, you can use these forecasts for fun or learning (like we do), but not for investing. Probably best just to not listen and avoid being tempted to take them too seriously.
Second, avoid recency bias, herd mentality, and overconfidence. Forecasts are often based on recent events and are often very unpredictable. Make sure you have a well-diversified investment allocation focused on what risk you can assume.
Third, keep your timeline in perspective. Most people have mid-to-long-term investment horizons and what happens in a month or quarter or even a year, does not really matter that much. Long-term trends are statistically more reliable.
Stay Invested with a Well Thought Out Plan
Investing isn’t a game of guessing from one year to the next. It’s trying to use statistics to your advantage over time. Trying to forecast in the shorter term is quite hard – there is just too much randomness in the stock market. Instead, for most investors, keeping a well-diversified portfolio designed to your specific needs, risk tolerance and timeline continues to be the most logical course of action.
Sources:
https://www.streetinsider.com/dr/news.php?id=21006697#:~:text=The%20current%20market%20consensus%20expects,by%20about%2010%25%20to%20%24200
https://news.yahoo.com/wall-streets-2023-outlook-for-stocks-164955543.html
https://news.yahoo.com/bank-of-america-us-equity-outlook-stock-market-165556408.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAALIfLIsNMExPK4ODnUHgIX1s81yUhal8uO0x1wlBNG4mndrPLrEX4D80n1EF-aylJwOZAfTYTdGhKzyi1PxrrWzCeEMDBwSosp8H2-7F8-BBt7EGj6sYX_yVCoB0iijrq4TGZhrfvSU1GfCqFWzQuGdo33D91fDOQZuCWeL3BeXJ
