As a financial advisor, I often get asked: “What do you think the market will do this year?” It’s a fair question that I've often caught myself overanalyzing.
However, it’s a question that reveals a misunderstanding about how unpredictable the future, including the economy and the markets, really is. This is something I have been thinking of a lot since I listened to a recent Morgan Housel Podcast on the subject.
We’re Wired to Predict—And Often Wrong
Humans are natural pattern-seekers. We crave certainty and control, so we try to forecast what’s coming next. But the truth is, we consistently overestimate our ability to predict the future. History is full of events—economic crashes, pandemics, technological breakthroughs—that no one saw coming. Ironically, we then use those same unpredictable events as the basis for future predictions.
Nowhere is this more evident than on Wall Street.
Wall Street’s Annual Ritual of Being Wrong
Every year, Wall Street professionals—analysts and strategists alike—publish forecasts for what the markets will return in the year ahead. And every year, many of those forecasts are proven wrong—often by a wide margin.
A recent Wall Street Journal article highlighted this phenomenon:
- 2024 S&P 500 Forecasts:
- Average prediction by stock analysts: 7.4%
- Average prediction by market strategists: 1.3%
- Actual return (including dividends): 25.02%
- 2023 S&P 500 Forecasts:
- Analysts predicted: 17.5%
- Strategists predicted: 6.2%
- Actual return (including dividends): 26.3%
These aren’t isolated misses. According to Joachim Klement, an investment strategist at Panmure Liberum, the correlation between these forecasts and actual market returns over the past 20 years has been minimal for analysts and zero for strategists.
So why do we keep listening?
The Real Driver: Human Behavior
Markets aren’t machines. They’re ecosystems powered by the psychology and behavior of millions of diverse people from different backgrounds and life experiences. Predicting the market means predicting people—what they’ll value, fear, chase, or avoid. That requires understanding their motivations, incentives, and social norms—all of which are constantly shifting.
This is especially tricky when predictions come from Wall Street professionals who, while highly educated, often live in a different world than the average American. Their models may be sophisticated, but they can’t account for the lived experiences and emotional decisions of everyday investors.
Anchoring and the Illusion of Precision
Psychologists Daniel Kahneman and Amos Tversky showed how easily our minds can be anchored by arbitrary numbers. When somebody on the news says the market will rise 10% this year, that number lodges in your brain—even if it’s baseless. It subtly shapes your expectations and decisions.
That’s why these forecasts aren’t just inaccurate, they’re toxic. They give us a false sense of certainty and distract us from what really matters.
What Should You Do Instead?
Predictions aren’t completely useless. Long-term planning requires some assumptions. But obsessing over short-term forecasts—ours or anyone else’s—is a waste of time and energy.
Focus on what you can control: your goals, your behavior, and your long-term plan.
That plan should be built to count on one thing: the unknown. It should be designed to maximize your chances of success in many different scenarios.
Looking for some help focusing on what really matters? Don’t hesitate to reach out. We’re here to guide you through uncertainty with clarity, confidence, and a plan that’s built to last.