Avoid sullying your reputation with flawed financial market forecasts
Humanity is bound by tradition. As each New Year gets underway, most of us take the opportunity to extend warm wishes to family, friends and colleagues as well as committing to a series of personal and business resolutions. In keeping with this custom, your writer kicks off 2025 by wishing you and your loved ones a joyful and prosperous 2025, with hopes for success in all of your endeavours.
Financial market traditions
Goal setting and the exchange of Happy New Year wishes are not the only traditions playing out as the old year makes way for the new. In the world of economics and finance, experts use the last weeks in December and first weeks in January to lock in their financial market predictions for the next 365-days. Economists offer up well-researched estimates for currency crosses, economic growth, inflation and interest rates while asset managers entice us with asset class return estimates and price targets on listed shares.
The practice of forecasting economic indicators and financial market prices is a bit of a fool’s errand, and the extent to which these forecasts differ from actual results is legend. Just one year ago, financial market experts were warning of an imminent recession in the United States; but instead of stuttering and dragging global financial markets down with it, the world’s largest economy ended 2024 on track for 2.8% GDP growth. The so-called ‘risk on’ asset classes revelled in this growth.
The S&P 500 posted a gain of 23% in 2024, building on the 24% it returned in 2023. These returns were driven by major technology companies with exposure to the artificial intelligence (AI) super trend, with seven shares, dubbed the Magnificent Seven, responsible for more than half of the 2024 result.
Missing the index ‘mark’ by miles
If you reflect on a snapshot of macroeconomic indicators at the end of 2023, and factor in the evidentially expensive US equity markets, then it is quite easy to make the case for a significant economic slowdown. At that time, the gurus trying to ‘call’ the direction of financial markets were concerned about declining housing starts; an inverted yield curve; rising levels of corporate debt; and widening credit spreads, to name a few. This explains why by late January 2024, the average Wall Street forecast was for the S&P 500 to finish the year at just 4861. Instead, it soared to 5881 points.
The analysts were so far off the mark that Mark Hulbert of US Market Watch penned the following stock market advice for 2025: “Pay no attention to stock market predictions [because they] are frequently, and comically, wrong.” He lamented that forecasts were “no more accurate than a coin flip” and consistently so. To support his views, Hulbert shared a range of 2024 price predictions for the S&P 500, made end-2023. Major investment houses with extensive knowledge of the US and world economy offered divergent opinions from 4257 points to fairly valued in the 4750 range to between 4700 and 4800 to a fair value target range of 4850 to 4950 to 4940 etc.
Hulbert refused to name and shame; but a quick Google search reveals bearish guesstimates from the likes of JP Morgan Chase, which offered an index target of just 4200 versus more optimistic sentiment from the likes of Yardeni Research with a target of 5400. Even this high estimate was way off. How do the experts get things so wrong, and why?
An excerpt from an article published on The Motley Fool gives some clues. They write that, “Excitement around AI and growth in the sector has sent stocks surging … [and has encouraged] investors to pile into a new sector, bidding utility stocks higher on bets of a demand surge due to the power needed to run AI data centres.” In other words, the common sense factors used by experts to calculate realistic price targets are meaningless in the face of investor euphoria.
A third year of double-digit gains ex US?
Can investors look forward to a third consecutive year of double-digit returns from the S&P 500? As always, there are dozens of market commentators willing to offer their views. An article penned by Aaron McDade, published on Trading View, notes that “the S&P 500 is expected to rise roughly 10% next year, according to a FactSet analysis of analyst estimates.” Under this scenario, the index will climb to 6679 points by end-December 2025.
McDade offered a strong disclaimer to market forecasts, nothing that analysts have underestimated the S&P 500 index in four of the last five years, and overestimated its returns a staggering 13 times over the past two decades. Investors will have to accept that estimates or forecasts are exactly what their dictionary definitions promise, namely ‘an approximate calculation or judgement of the value, number, quantity or extent of something’.
South Africa’s macroeconomic numbers and financial markets are just as difficult to forecast. Entering 2025, a quick scan of the news flows reveals enthusiasm for an economic windfall under the Government of National Unity (GNU), with many asset managers ‘talking up’ domestic equities A Bloomberg article appearing on Mail & Guardian trumpets that “South Africa’s economy is expected to improve over the next five years as the GNU continues implementing reforms, particularly in Eskom and Transnet.” Really?
GNU fanfare aside; SOEs remain an economic drag
It does not take long to confirm dismal financial results from these state-owned enterprises (SOEs) in the most recent reporting preiods. Eskom kept the lights on but posted a R55 billion after-tax loss for the 2024 financial year. And Transnet lost R2.2 billion in the six months to end-September last year. As the New Year gathers momentum, the online media are chockful of ominous headlines about the billions in expenditure required to get electricity, transport and water sanitation infrastructure up to code. If government cannot deliver on the foundation level of Maslow’s Hierarchy of Needs, then what hope does South Africa Inc have of shooting the lights out?
Bloomberg’s upbeat tone differs from the more subdued stance form the South African Reserve Bank (SARB). In its October 2024 Monetary Policy update, the central bank said the domestic economy expanded by just 1.9% in 2022 and 0.6% in 2023. They expect 1.1% in 2024 and gradual improvements to 1.8% by 2026.
“That growth remains well below the estimated long-run, steady-state level of 2.5%,” they wrote, before adding that “strong growth in investment will be needed to make up for the loss of capacity and jobs.” Where this GDP number settles is anyway moot in the dual contexts of 35% unemployment and multi-year underinvestment in public infrastructure; it is not sufficient to get the country back on track.
An echo chamber approach
An article by Daily Investor predicts that South African assets will “increase in value throughout 2025 as economic fundamentals that were previously headwinds have now flipped to become clear tailwinds for the local economy.” The piece references a financial market outlook shared by Momentum Investments who are “cautiously optimistic” about returns from domestic assets for 2025. Overall, the asset manager seemed positive on the outlook for South African bonds and equities with the latter asset class supported by attractive valuations.
But the year-end review that resonated with your writer was penned by Anet Ahern, CEO at PSG Asset Management under the title ‘Looking ahead to 2025: Why focusing on predictions is doomed to fail’. Yes, dear reader, you search until you find a credible source to support your view. “Despite the time and effort many put into making predictions, especially at this time of the year, events seldom turn out exactly as anticipated,” she wrote. There is too much volatility in global markets to guess where the FTSE (UK stocks) or JSE (South African stocks) or S&P 500 will be in three, six or 12 months.
Instead of making predictions for 2025, Ahern shared some sentiment that should resonate with financial advisers and their clients. “We do not want to offer you predictions about what currencies, markets or asset classes will do in the coming year; rather, we would like to offer you the reassurance that there are always good investment opportunities to be found for patient investors,” Ahern wrote. “Quality management teams have the ability to deliver results that defy expectations and drive shareholder value even in tough and unforgiving environments, especially where these markets are underpinned by fundamental drivers and constrained by real factors.”
Keeping clients on track
Financial advisers should place trust in their asset manager and discretionary fund management (DFM) partners to do the legwork on the asset class allocation and geographic diversifications needed to achieve a certain target. This frees up advisers to ensure that their clients are invested in needs- and risk-appropriate portfolios that will steer them to the outcomes identified during the financial planning process. The adviser’s role is to keep clients on track, and to execute on the clients’ financial plans regardless of financial market volatility.
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