How to Predict the Market Like the Experts

Andrew Stewart, CFA

Andrew Stewart, CFA

Aug 14, 2018, 3:00:27 PM

 

Stock Market Overconfidence

The highly unlikely 2017 and the more typical 2018 that has followed has me contemplating the difficulty of forecasting how the market will do in the future.  I don’t remember anyone anticipating, in December 2016, a banner year in 2017 via a nice straight line.  Indeed, predicting any given future year’s stock market performance is very difficult, but why don’t you try!

Play the Stock Market Guessing Game

How did you do?  Were you overconfident?  Did you at least do better than the "expert" CFOs?  How did you stack up against our other readers?  Please post your guessed range in the Comments section below, and we'll update the "typical players" chart over time.

Daniel Kahneman, the Nobel prize winning behavioral economist, discussed the CFO study in his book Thinking, Fast and Slow:

"Even if [the CFOs] knew how little they know, the executives would be penalized for admitting it.  President Truman famously asked for a “one-armed economist” who would take a clear stand; he was sick and tired of economists who kept saying, “On the other hand . . .”

Of course, we can all hope for good years like 2017 and dread bad years like 2008.  Hoping and dreading is not predicting, though.  Forecasting a particular outcome in the near future, without allowing a large margin of error, indicates overconfidence.  If you insist on using a narrow range, your best forecast would be to guess that your range is wrong.

The market is a complex system, subject to unknowable future events and behaviors, making it difficult to predict correctly unless you give yourself a wide margin of error.  Which is why when you meet with our team and ask me what my prediction for the market is, you probably won’t feel like I’ve set your mind at ease, but you will know that I’m being honest.

Andrew Stewart, CFA is a Senior Portfolio Manager at Exchange Capital Management, a fee-only, fiduciary financial planning firm.  The opinions expressed in this article are his own.