Another Reason to Ignore Stock Market Forecasts

Late each year and early the following year, the economists and analysts air out their forecasts for the coming year. Each year, almost all the stock market forecasts are for returns in the high single digits (8% to 10%). That’s the long-term average annualized return. The funny thing is, these forecasts are way off the mark. While the average annualized long-term return is 8% to 10%, it is rare for the stock indexes to return that amount in any one year. The returns in a calendar year usually are much higher or lower. Take a look at these charts from Bespoke Investment.

While history supports strategists routinely calling for gains, why do they constantly call for gains in the neighborhood of five to ten percent?  Our guess would be that it is a good enough sounding number without really sticking your neck out.  At this level, the strategist still sounds bullish enough so that if the market has a big year, he or she can still say, “I told you so.”  But if the market goes down, they won’t look too wrong.  Also, from a historical perspective, the DJIA’s average annual return since 1900 has been 7.4%, so the range of five to ten percent sounds right around average.

What makes the consensus call for upper single digit gains in the market so interesting is that it rarely happens.  For example, going back to 1900 there have only been eight years where the DJIA had an annual gain of between five and ten percent.