Hi Guys,
The investment universe is awash in market future return forecasts. Most of these forecasts properly belong in the trash bucket. I believe most of us suspect that the individual investor loses huge amounts of money in the Futures marketplace.
But private investors are not the only losers in forecasting market returns. The industry professionals suffer this same endemic affliction. Forecasting follies are the rule rather than the exception.
CXO Advisory Group just published its study results from a formal survey called “The Anxious Index”. The Anxious Index is the probability of a recession in the coming quarter based on an extensive formal survey of professional financial and economic forecasters. CXO took these recession prediction data and attempted to correlate the likelihood of recession forecasts with S&P 500 Index returns.
Here is the Link to the CXO study:
http://www.cxoadvisory.com/4240/investing-expertise/should-the-anxious-index-make-investors-anxious/CXO concluded as follows: “In summary, evidence from simple tests suggest that the “Anxious Index” from the Survey of Professional Forecasters is probably not a useful indicator of future U.S. stock market behavior.”
So this elite group of financial and economic specialists might be able to predict the general direction of the economy, but these forecasts are of doubtful value when trying to extrapolate their economic forecasts to project near-term market rewards.
At least in the short term, the reflexive speculative character of investors overcome any reflective considerations like the health of the economy. That’s disappointing, but can not endure over the long haul. Ultimately, there must be a return to reality. In the end, stock prices reflect GDP growth rate, and that GDP growth is tightly correlated to corporate profits.
Enjoy the CXO study.
Best Regards.
Comments
I have had second thoughts since my original post.
I initially used a circular argument when interpreting the CXO findings. I have corrected that error by inserting the strong relationship between GDP growth rate and corporate earnings when assessing the CXO conclusion.
Additionally, I originally expressed disappointment in the lack of correlation. On closer examination, I should not have been disappointed at all. Given the poor forecasting track record that economists demonstrate time and time again, that failure should be fully anticipated. Some market wizards use the economists forecast in a contrarians manner.
In a sense, it is a fool’s game to attempt a correlation between a known inaccurate forecast and an almost random walk stock market. I say almost random walk because although daily market pricing is close to a pure random event, the monthly returns are slightly more orderly and predictable. But a statistician is surely on wobbly grounds trying to find a correlation between these two sets of data. If one was discovered, it would be a lucky coincidence.
Sorry for my initial misinformation and misinterpretations. I’m in too much of a rush preparing for another vacation trip.
Best wishes.