Two notes before we start. At the beginning of the letter I am going to launch a few nukes on the banality of making predictions based on models. That is at least the first half of the letter. If you want only my musings on events to look for in the coming year, skip down about halfway.

Second, and VERY IMPORTANT. At least to me. This is the typically the most forwarded letter of the year. If you are reading me for the first time, this letter is free – you can subscribe at www.mauldineconomics.com by simply entering your email address. And you can get free emails from a brilliant group of writers and analysts who are far smarter than I am, if you choose. The whole team at Mauldin Economics looks forward to serving you. Now, let’s jump in!

Wall Street Takes the Heat for You

“What will the stock market do this year?” It seems like a simple question. You might wish for a simple answer to it, and think that people who watch stocks for a living should know that answer. Not so. The evidence shows they are no more accurate than anyone else is.

Morgan Housel of The Motley Fool skewered Wall Street’s annual forecasting record in a story last February. He measured the Street’s strategists against what he calls the Blind Forecaster. This mythical person simply assumes the S&P 500 will rise 9% every year, in line with its long-term average.

The chart below show’s Wall Street’s consensus S&P 500 forecast versus the actual performance of the S&P 500 for the years 2000–2014.

The first thing I noticed is that the experts’ collective wisdom (the blue bars) forecasted 15 consecutive positive years. The forecasts differ only in the magnitude of each year’s expected gain.

As we all know (some of us painfully so), such consistent gains didn’t happen. The new century began with three consecutive losing years, then five winning years, and then the 2008 catastrophic loss.

The remarkable thing here is that forecasters seemed to pay zero attention to recent experience. Upon finishing a bad year, they forecasted a recovery. Upon finishing a good year, they forecasted more of the same. The only common element is that they always thought the market would go up next year.