When you predict the same thing will happen to the stock market year after year, eventually you’re going to be wrong.
That’s what happened to Wall Street strategists in 2018, whose perennial optimism about U.S. equities got bushwhacked by the worst fourth quarter in a decade. In January, the group predicted the S&P 500 would end 2018 at 2,893, on average, translating to an 8 percent gain. Instead, the benchmark index dropped 6 percent to finish just above 2,500. The almost 400-point gap is the biggest since the 2008 financial crisis.
Big misses when stocks fall are a predictable outcome for strategists, who since the start of the century have never forecast a down year in U.S. equities. While obviously nothing to brag about, it also bespeaks a propensity to tailor the outlook around what usually happens -- that is, stocks going up.
“It’s not a particularly courageous prediction because when people are saying the market is going to be up 8 percent, they’re basically saying it’s going to be an average year,” said Eric Kuby, chief investment officer who helps oversees $1.4 billion at North Star Investment Management in Chicago. “Looking back at 2018, it’s anything but average. It’s a very disappointing year.”
Blame a fourth quarter sell-off that ruined a year that before October had gone pretty much according to plan. At a record 2,930.75 in September, the S&P 500’s year-to-date gain stood at almost 10 percent.
Then the market plunged, sending the benchmark to the brink of a bear market as fears of a recession crept up amid intensified U.S.-China trade tensions and a fourth rate hike by the Federal Reserve. Strategists, who had rushed to raise their forecasts amid one of the best starts of a year ever, saw their bullish calls steamrolled. None of the 19 strategists followed by Bloomberg came closer than 140 points of the 2018 close.
“If we had this conversation at the end of the third quarter, they would have gotten an A” on the report card, said Tom Wirth, director of wealth manager for Chemung Canal Trust, which manages $1.9 billion in Elmira, New York. “The market wants to go higher over the long term, always. It’s just it has periods that it doesn’t and predicting when that’s going to be is the most difficult thing to do.”
At least four strategists have reduced their projections for next year, including Barry Bannister at Stifel Nicolaus, Jonathan Golub at Credit Suisse, Sanford C Bernstein’s Noah Weisberger, and Chris Harvey at Wells Fargo.
Still, even after the downward revisions, their overall bullish stance remains intact. All of the 22 strategists tracked by Bloomberg see higher prices over the next 12 months. At 2,975, the average estimate points to a 19 percent gain from Monday, a prediction that’s more optimistic at this time of year than any since at least 1998.
True, the steepness of the trajectory partly reflects how far stocks just fell. After all, the mean forecast is only 40 points away from the all-time high.