JPMorgan (NYSE:JPM) publishes its annual "Long-Term Capital Market Assumptions" report every year with the intent of providing professional guidance in terms of what investors should expect from markets over the next 10 to 15 years.
On its face, being able to accurately forecast markets 10 to 15 years out is extremely difficult. In a world of randomly occurring events, there are many scenarios that may unfold that could take us down many different paths. Fiscal and monetary policy coming out of Washington D.C., wars and conflicts around the world, economic expansions and recessions, technological development, and even natural disasters could all affect the course we are currently tracking and the assumptions we make based on our current position.
Empirical evidence has not been favorable to market forecasters. If we could see the future with such clarity, then we would be able to take full advantage of that 20/20 vision to earn above-market returns on a consistent basis. But as we have shown time and time again, there is very little evidence that investment professionals can deliver on their prophecies. To give an example, a study performed by CXO Advisory Group examined 4,629 total market forecasts across 28 well-known market-timing gurus between 2000 and 2012. What they found is that the vast majority of gurus didn't do better than simply flipping a fair coin (50/50 chance) and nobody did well enough to outperform a simple buy and hold strategy of the market.
If we cannot reliably forecast the future, then what is the best assumption to make about the future? Because we live in a world of randomly occurring events, the best estimate for the future expected value of a random variable is its long-term historical average with some small exceptions, which we will discuss later on.
So how accurate has JPMorgan been with its long-term assumptions?
JPMorgan has recently published the 21st edition of its Long-Term Capital Market Assumptions Report. We analyzed six of JPMorgan's reports going back to 2011 (link of that actual report), which is the oldest report we could get access to, to see how its predictions stacked up against what we actually experienced. If you have access to previous editions, we would like to borrow them so we can expand our study.
We condensed its list from 47 individual asset classes to just 7 major U.S. equity, REIT, and commodity asset classes to ensure that we had a reliable index from which to compare performance and to analyze the indexes that we think are most known and important to U.S. and IFA investors.
The table below shows each individual asset class, their respective benchmark, JPMorgan's prediction in 2011 (JPM Prediction), the total return for each individual year after the prediction was made, the six-year annualized return that we actually experienced from January 1, 2011, to December 31, 2016, as well as the difference between the prediction made and the realized return (JPM Error). Results are listed from greatest to smallest error.
JPMorgan Long-Term Capital Market Assumptions from 2011 to 2016 for U.S. Forecasts
|Asset Class||Benchmark||2011 JPM Forecast||Actual 2011||Actual 2012||Actual 2013||Actual 2014||Actual 2015||Actual 2016||Annualized 6 Yrs.||JPM Error 6 Yrs.|
|Commodities||Bloomberg Comm. TR||7.00%||-13.32%||-1.06%||-9.52%||-17.01%||-24.66%||11.77%||-9.70%||16.70%|
|U.S. Large Cap Growth||FF LG Research Index||7.50%||3.85%||15.14%||33.48%||13.68%||4.67%||8.56%||12.82%||-5.32%|
|U.S. Large Cap Value||FF Large Value Research||8.00%||-10.22%||29.71%||40.15%||11.71%||-7.87%||25.75%||13.27%||-5.27%|
|U.S. REITs||DJ U.S. Select REIT||6.50%||9.37%||17.12%||1.22%||32.00%||4.48%||6.68%||11.36%||-4.86%|
|U.S. Large Cap||S&P 500 Index||7.75%||2.11%||16.00%||32.39%||13.69%||1.38%||11.96%||12.47%||-4.72%|
|U.S. Mid Cap||Russell MidCap Index||8.25%||-1.55%||17.28%||34.76%||13.22%||-2.44%||13.80%||11.83%||-3.58%|
|U.S. Small Cap||FF US Small Cap Index||8.25%||-5.38%||17.38%||43.61%||3.42%||-7.62%||22.90%||11.02%||-2.77%|
In order to determine the accuracy of JPMorgan's predictions, we must first define what "accurate" means. In this analysis, we define accurate as being within plus or minus 0.50% of their original prediction. For example, if JPMorgan predicted that the S&P 500 would be 7.75% over the next 10-15 years, we would say it was accurate if the annualized return ended up being somewhere between 7.25% and 8.25%.
Based on this definition of accuracy, you can see that, so far, JPMorgan has not been accurate with its long-term predictions for the asset classes we selected. See the links to the reports if you like to see more predictions. Of the seven total predictions listed, they were inaccurate with all of their predictions.
We want to remind our readers that JPMorgan's predictions were intended for the 10-15 year time horizon so it still has 4-9 years for its predictions to come to fruition. But what this does highlight is how difficult it can be for even the brightest of professionals to predict how events are actually going to unfold.
We also analyzed JPMorgan's assumptions from 2012, 2013, 2014, 2015, and 2016 (link of actual reports) and compared them to what actually transpired. The tables below include the same metrics as well as the percentage of predictions that JPMorgan got right (plus or minus 0.50%).
JPMorgan Long-Term Capital Market Assumptions from 2012 to 2016 for U.S. Forecasts
|Asset Class||Benchmark||2012 JPM Forecast||Actual 2012||Actual 2013||Actual 2014||Actual 2015||Actual 2016||Annualized 5 Yrs.||JPM Error 5 Yrs.|
|Commodities||Bloomberg Comm. TR||6.50%||-1.06%||-9.52%||-17.01%||-24.66%||11.77%||-8.95%||15.45%|
|U.S. Large Cap Value||FF Large Value Research||7.75%||29.71%||40.15%||11.71%||-7.87%||25.75%||18.66%||-10.91%|
|U.S. Large Cap||S&P 500 Index||8.00%||16.00%||32.39%||13.69%||1.38%||11.96%||14.66%||-6.66%|
|U.S. Large Cap Growth||FF LG Research Index||8.25%||15.14%||33.48%||13.68%||4.67%||8.56%||14.70%||-6.45%|
|U.S. Small Cap||FF US Small Cap Index||8.50%||17.38%||43.61%||3.42%||-7.62%||22.90%||14.63%||-6.13%|
|U.S. Mid Cap||Russell MidCap Index||8.75%||17.28%||34.76%||13.22%||-2.44%||13.80%||14.72%||-5.97%|
|U.S. REITs||DJ U.S. Select REIT||7.00%||17.12%||1.22%||32.00%||4.48%||6.68%||11.77%||-4.77%|
JPMorgan Long-Term Capital Market Assumptions from 2013 to 2016 for U.S. Forecasts
|Asset Class||Benchmark||2013 JPM Forecast||Actual 2013||Actual 2014||Actual 2015||Actual 2016||Annualized 4 Yrs.||JPM Error 4 Yrs.|
|Commodities||Bloomberg Comm. TR||5.75%||-9.52%||-17.01%||-24.66%||11.77%||-10.83%||16.58%|
|U.S. Large Cap||S&P 500 Index||7.25%||32.39%||13.69%||1.38%||11.96%||14.33%||-7.08%|
|U.S. Small Cap||FF US Small Cap Index||7.75%||43.61%||3.42%||-7.62%||22.90%||13.95%||-6.20%|
JPMorgan Long-Term Capital Market Assumptions from 2014 to 2016 for U.S. Forecasts
|Asset Class||Benchmark||2014 JPM Forecast||Actual 2014||Actual 2015||Actual 2016||Annualized 3 Yrs.||JPM Error 3 Yrs.|
|Commodities||Bloomberg Comm. TR||3.75%||-17.01%||-24.66%||11.77%||-11.26%||15.01%|
|U.S. REITs||DJ U.S. Select REIT||6.75%||32.00%||4.48%||6.68%||13.73%||-6.98%|
|U.S. Small Cap||FF US Small Cap Index||7.50%||3.42%||-7.62%||22.90%||5.50%||2.00%|
|U.S. Large Cap Growth||FF LG Research Index||7.25%||13.68%||4.67%||8.56%||8.91%||-1.66%|
|U.S. Large Cap||S&P 500 Index||7.50%||13.69%||1.38%||11.96%||8.87%||-1.37%|
|U.S. Large Cap Value||FF Large Value Research||7.75%||11.71%||-7.87%||25.75%||8.98%||-1.23%|
|U.S. Mid Cap||Russell MidCap Index||7.75%||13.22%||-2.44%||13.80%||7.92%||-0.17%|
JPMorgan Long-Term Capital Market Assumptions from 2015 to 2016 for U.S. Forecasts
|Asset Class||Benchmark||2015 JPM Forecast||Actual 2015||Actual 2016||Annualized 2 Yrs.||JPM Error 2 Yrs.|
|Commodities||Bloomberg Comm. TR||3.50%||-24.66%||11.77%||-8.24%||11.74%|
|U.S. Mid Cap||Russell MidCap Index||6.75%||-2.44%||13.80%||5.37%||1.38%|
|U.S. REITs||DJ U.S. Select REIT||6.50%||4.48%||6.68%||5.57%||0.93%|
|U.S. Large Cap Value||FF Large Value Research||6.75%||-7.87%||25.75%||7.64%||0.89%|
|U.S. Large Cap Growth||FF LG Research Index||6.25%||4.67%||8.56%||6.59%||0.34%|
|U.S. Small Cap||FF US Small Cap Index||6.75%||-7.62%||22.90%||6.55%||0.20%|
|U.S. Large Cap||S&P 500 Index||6.50%||1.38%||11.96%||6.54%||0.04%|
JPMorgan Long-Term Capital Market Assumptions from 2016 to 2016 for U.S. Forecasts
|Asset Class||Benchmark||2016 JPM Forecast||Actual 2016||JPM Error|
|U.S. Large Cap Value||FF Large Value Research||7.25%||25.75%||-18.50%|
|U.S. Small Cap||FF US Small Cap Index||7.25%||22.90%||-15.65%|
|Commodities||Bloomberg Comm. TR||3.00%||11.77%||-8.77%|
|U.S. Mid Cap||Russell MidCap Index||7.25%||13.80%||-6.55%|
|U.S. Large Cap||S&P 500 Index||7.00%||11.96%||-4.96%|
|U.S. Large Cap Growth||FF LG Research Index||6.75%||8.56%||-1.81%|
|U.S. REITs||DJ U.S. Select REIT||6.00%||6.68%||-0.68%|
As you can see, JPMorgan has been consistently inaccurate with most of its predictions. It was the most accurate with its predictions during 2015, but not the majority. It is important to note that 2013 was an interesting year in which JPMorgan deviated from its typical template and only offered predictions for a small subset of asset classes. We included it in the analysis, but it should be seen as an outlier event as it went back to its original template the following year.
These predictions have historically been used in portfolio optimizers in terms of developing asset allocations for investors. You can see the risk inherent in using JPMorgan's assumptions as the vast majority are more than 1% off, which can lead to dramatic effects over a long time horizon. The false security offered by these reports may entice investors to move their money around as JPMorgan updates its assumptions from year to year. While this type of behavior has shown to be harmful for the investor, JPMorgan often makes money on this revolving door activity from sales loads and commissions.
The other question we wanted to answer is "how much more accurate would investors have been if they just assumed that returns going forward are going to be similar to their long-term historical average?"
The table below shows the same seven asset classes as before, their respective benchmark indexes, the long-term historical annualized return of that asset class going back as far as we can, the actual six-year annualized return, the difference between JPMorgan's prediction and the actual return (JPM Error), the difference between the long-term historical average and the actual return (Hist Error), and the difference between JPMorgan's Error and the Historical Average Error (JPM-Hist.).
|Asset Class||Benchmark||LT Historical Average||Actual 6Yrs.||JPM Error||Hist Error||JP-Hist.|
|Commodities||Bloomberg Comm. TR||2.43%||-9.70%||16.70%||12.13%||4.57%|
|U.S. Large Cap Value||FF Large Value Research||12.06%||13.27%||-5.27%||-1.21%||4.06%|
|U.S. REITs||DJ U.S. Select REIT||12.35%||11.36%||-4.86%||0.99%||3.87%|
|U.S. Large Cap||S&P 500 Index||10.04%||12.47%||-4.72%||-2.43%||2.29%|
|U.S. Mid Cap||Russell MidCap Index||13.30%||11.83%||-3.58%||1.47%||2.11%|
|U.S. Large Cap Growth||FF LG Research Index||9.54%||12.82%||-5.32%||-3.28%||2.04%|
|U.S. Small Cap||FF US Small Cap Index||11.87%||11.02%||-2.77%||0.85%||1.92%|
This last term is the one we should find most interesting. A negative number indicates that JPMorgan was more accurate while a positive term indicates the historical average was more accurate. You can see that across all asset classes, the historical average was closer to predicting what actually transpired from 2011 to 2016 versus that of JPMorgan's predictions.
The big takeaway for investors is that relying on professional judgment in terms of predicting future returns is not a reliable strategy. JPMorgan has been, on average, 6.17% off across seven major asset classes between 2011 and 2016. This should highlight to investors and investment professionals how meaningless these types of predictions are. Because historical returns for major asset classes have been shown to follow a random walk, using long-term historical averages with context and judgment is a more reliable solution. IFA constructed our own indexes utilizing data from the Center for Research in Security Prices (CRSP) going back to 1928 in order to provide our clients the most accurate representation of future expected returns as we possibly can. We believe this is the most prudent approach to long-term financial planning.
Based on this preliminary study of JPMorgan's capital market assumptions, we think it is time for it to stop publishing this annual forecast and stop luring investors into some false security that a large brokerage firm has some super power that allows them to see the future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.