Perspective On Stock Market Predictions: A Look Back at 2011

 |  Includes: BAC, BCS, CS, GS, JPM, MS
by: The Keating Letter

This is the time of year when stock market prognosticators and economists make predictions for 2012. CNBC, Bloomberg, Barron’s and other news organizations promote these forecasts like they’re meaningful, and viewers and readers can all feel a bit better because the predictions are nearly always rosy. I like to read old Barron’s and Forbes to keep things in perspective. There’s nothing better to look back upon than stock market predictions. Here are some 2011 predictions made at the end of 2010:

Goldman Sachs’ big call was to make large cap commercial banks one of its top trades for 2011. The ETF based on the KBW Bank Index is down 24% this year. Goldman also pegged year-end S&P 500 at 1450. We’re at 1250 as I write this.

JP Morgan’s David Kelly predicted the S&P 500 would be at 1400, the year-end 10 Year would be 4.25%, and the Fed would raise rates in November.

Barclay’s Barry Knapp had GDP at 3.1% for the year and the S&P 500 at 1420.

Credit Suisse was better with a 1250 S&P target.

Merrill Lynch’s David Bianco had a 1400 S&P target and 10 Year Treasuries at 4%

Morgan Stanley also called for a 4% 10 Year, in addition to 4% GDP growth. The actual 10 Year yield is currently under 2%.

The demand for predictions like these help to fool people into thinking the markets are rational over short term periods of time, a year included. The fact is that-- even in years where some of these predictions are correct-- there’s no way to consistently foresee what will happen. The stock market doesn’t always care about earnings and the economy doesn’t follow a straight path, nor should it.

The public wants predictions, though. It’s not David Kelly’s fault that his forecast was wrong. His boss makes him put out these notes. It’s part of his job, and it’s not even his boss’s fault. JP Morgan’s competitors all make end of the year predictions, so JP Morgan also has to. People want a crystal ball, so analysts have to give it to them.

If investors look at the motivation behind these predictions, they wouldn’t take them as seriously. It’s probably better to ignore them completely, lest any of those ideas slip into your subconscious. Even worse would be the thought that it’s even possible to predict. Hubris is the most important thing to protect against.

If you want to keep yourself in check, head on over to this BusinessWeek article from December 20, 2007. Some very talented analysts, some of whom I really respect, put out their end of the year 2008 stock market predictions. William Greiner, Tobias Levkovich, Jason Trennert, Bernie Schaeffer, Leo Grohowski, Thomas MacManus, and David Bianco all are included. Their S&P 500 predictions ranged from 1520 to 1700.

On December 31, 2008 the S&P 500 stood at 903.25.

Disclosure: I am long BAC.