Ignore Predictions About 2017

Posted On December 28, 2016 10:36 pm

It’s natural that as we approach the end of a very eventful and surprising year, for stocks as well as the world at large, people are eager to know what 2017 will bring, especially for a stock market that is now approaching the end of year eight of an epic bull run.¬†Well the “pros” are nearly all bullish, with predictions for the S&P 500’s 2017 close running the gamut from 2,230 to 2,500, representing an expected -1% to 11% increase in the coming year.

Of course there are some rather extreme predictions as well, including that US healthcare stocks will crater 50% in 2017. The important thing to remember is that almost all of these predictions need to be ignored, because the analysts making them have a terrible track record of plucking such predictions out of thin air and being caught flat footed. For example between 2000 and 2016 analysts have, on average predicted an up year every single time, and predicted that over this time period the market would rise by 9.5% CAGR (historically since 1871 the S&P 500 has returned 9.1% CAGR).

In reality the markets fell about 30% of that time and total returns came in at just 3.9% CAGR. In fact, according to statistician Salil Mehta, (former head of research analytics for TARP), “it’s not easy to be as bad as they are…they are much worse than random chance alone would predict.” Or to put it another way, analyst predictions are worse than useless, because a simple coin flip, dart board, or pretty much any pet, would have a better chance of outguessing “the experts”.

The reason for this is simple. In the short-term the market can often be irrational and trade based on whatever story is more in vogue at the time. For example, this most recent rally was based on the idea that massive infrastructure spending, giant tax cuts, and lots of deregulation would send corporate profits soaring. Indeed that may prove to be the case. BUT at the same time the market has been ignoring the potential risk of a Trump initiated trade war that could end up raising consumer prices, and perhaps dropping the US into a recession.

Come Trump’s first 100 days, when Congress will have to actually start hammering out plans for this promised stimulus, (which could end up pushing any actual tax cuts into 2018), the size, and specifics of what actually makes it to Trump’s desk could be far less earnings growth enhancing than what the market is currently dreaming about. All of which means that there is no way to know whether 2017 ends up becoming the greatest year for the stock market, or the worst.

History and statistics tell us that it’s likely to be somewhere in the middle. However, given that the market has risen in 70% of years, the easy, and lazy prediction is that the market will go up by about 9.1%.

That prediction would have been incredibly solid in 2016, one of the most unpredictable and crazy years in recent memory. The year began with a fed rate hike/oil crash/China market panic freak out that resulted in the worst January in history. That was quickly followed by a massive rally, then Brexit gave us a 2 day crash and the lowest US interest rates in history thanks to the flight to safety. Finally the strangest US presidential election that ever was, and likely ever will be, saw Donald Trump elected president, followed by, not a massive crash, but the 5th strongest post election rally in market history.

At the end of all this craziness? The S&P 500 is up 9.2% from the start of the year, almost exactly the market’s historical return.

Which just goes to show that the key to long-term wealth and income creation has nothing to do with events, no matter how historically important they may seem. Rather just owning solid dividend growth stocks, for the long-term, buying on dips, and reinvesting the dividends will get you to where you need to go.


About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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