How Good Are BusinessWeek's Seers?

| About: SPDR S&P (SPY)
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This year BusinessWeek magazine discontinued the annual seers forecast, which is like Barron’s magazine annual roundtable. Every year these investment industry experts forecast next year end S&P 500 value. Interestingly most of these big money managers and industry experts far come up with numbers from actual S&P 500 year end numbers. One of the Forbes columnists Ken Fisher came up with a theory, the actual year end S&P 500 number always in the far ends of the histogram, where there are empty spots.

Last year, I plotted 81 BusinessWeek analysts' 2007 S&P forecast. The data estimation ranged from 1094 to 1640. However, I ignored far outside number 1094 and plotted from 1260. According to Ken Fisher the S&P 500 should have ended at 1325 or 1425. Last year S&P 500 ended at 1468. Not Bad. However, only one seer from last year (Tim Swanson) was able to come up with 1470 and six other experts came in 10 point range of the final S&P 500 out of 81 industry insiders.

Just for curiosity, I calculated the mean of the 81 predictions, which was 1501, and the standard deviation was 19 (I used probability based on number of predictions). With 95 percent of confidence interval the lower and upper values I came up was (median +/ two standard deviations) 1463 and 1539. Actually S&P 500 last year ended at 1468, five points close to my lower value.

This year, BusinessWeek invited only 13 experts for 2008 S&P 500 forecast. Their 2008 year end S&P 500 forecast ranged from 1350 to 1780. The mean value was 1612 and standard deviation was 117. If I go with same 95 percent confidence level, lower end of S&P 500 will be at 1377 and higher end at 1846. In reality, how bullish or bearish the market will be decided by the global and American events including year end election, oil and grain prices, our global exports, consumer spending and consumer debt not by any statistical numbers. With the US economy slowing due to housing slump and over stretching consumer debt, we don’t know how things turn around at end of the year. But these numbers give valuable information about how the deep pocketed investors valuing the market and investing based on their future expectations of the market.