Last Year’s Market Predictions – What was the Final Batting Average?
Here’s a look back to see how the experts’ projections stood up in the topsy turvy year of 2020. We unearthed a December 19, 2019 article on Yahoo by Emily McCormick that highlighted the 2020 predictions of 23 Wall Street strategists. Each provided a target for the S&P 500 for the year ending 2020, along with additional commentary. The majority of the reports were issued in the first two weeks of December 2019. The data and comments we are citing come directly from that article.
What Actually Occurred
Before we get into the observations, we would note the S&P 500 closed at 3,230.78 on December 31, 2019. It closed higher at 3,756.07 on December 31, 2020. That’s a 16.2% annual return. Obviously, that return masks a wild intra-year ride, as the S&P 500 bottomed out on March 23 at 2,191 (intra-day) and closed the day at 2,237.40. For those investors with perfect timing, the S&P 500 rose 71.6% from its March 23 lows to the end of 2020.
In mid-December 2019, the average of the 23 estimates for the 2020 closing S&P 500 index was 3,332, off by nearly 13% relative to what the actual closing level was in 2020. Obviously, COVID and all its implications were not factored into the prognosticators’ forecasts. The range of forecasts went from 3,000, implying a down year in 2020, to as high as 3,600, which was still more than 4% below the S&P 500’s actual performance. The 3,600 prediction was a true outlier as the next closest estimate was 3,450. If we looked at a distribution of the forecasts, nine of the 23 were below the 3,332 average.
So, in the year of wild market swings, impacted by a 100-year pandemic, the experts were clearly off by a significant factor.
There were recurring themes within the commentary from the strategists as to what could impact the stock market in 2020. As one would expect, the election, China/U.S. relations, especially as related to trade, and an accommodative Federal Reserve were mentioned prominently by most strategists.
Forecasts vs. Actual
But some of the other predictions did not play-out as well. For example, in assembling their forecast, most of the strategists predicted higher earnings for the S&P 500. In fact, many of the projections for S&P 500 earnings were in the $165-$175 range; when fully reported, earnings are actually expected to have dropped year-over-year to the $135 level from $163 in 2019.
Some strategists favored non-U.S. markets, predicting better returns overseas. But according to Yardeni Research, the MSCI Share price index for the U.S. was up 19.2% in 2020, well above the All Country Index of 14.3%. And in fact, the U.S. market outperformed each of the five other indexes: European Market, Japan, U.K., and Emerging Markets. To be fair, the Asian Emerging Market significantly outperformed the U.S., but the overall Emerging Markets average was held back by poor performance in Latin America.
Another prediction raised was a move from Growth stocks to Value stocks. This switch does not appear to have happened as much of the upswing in the Index was driven by the growth-oriented FAANGM stocks during much of the year.
One interesting prediction that seems to have come true was by Julian Emanuel of BTIG, who stated that with “zero-fee online trading, 2020 could be the year the public falls in love with stocks again.” The rise of Robinhood seems to agree with this statement.
It is often said, with good reason, that it is easier to predict the stock market when given a longer time horizon, perhaps even ten years or longer. The reason is the smoothing that the impact of time and average growth has on the outlier years. Predicting what will happen tomorrow involves so many unknown influences that “experts” are befuddled by the exercise daily.
The predictions made in 2019 concerning the earnings of the S&P 500 were off in terms of direction (they were down, not up). This would cause one to expect lower stock prices than predicted. Obvious this didn’t happen either. While knowledge and understanding of what market strategist predictions are is a useful guide to our own risk/reward assessments., it’s helpful to remember as we enter the new year and new sets of market predictions that the stock market is like a talented major league pitcher – they’re able to get even the most gifted hitters out more often than not. Yet, we can still improve our own skills by observing these pitchers play.