Stocktake: Bad forecasts don’t deter faith in future forecasts

Given forecasters got it wrong in 2020, why believe their predictions about 2021?

Amid ongoing chatter about 2021 forecasts, one must ask: given forecasters got it wrong in 2020, why believe their prognostications about 2021?

"Every 2021 economic outlook should be required to come with the 2020 outlook written last December," tweeted Morgan Housel of the Collaborative Fund last month.

Some see that as harsh, saying no one could have foreseen Covid-19, but that is Housel’s point: you can’t predict the future.

Overestimating gains

Strategists almost always get it wrong, overestimating market gains in 12 of the last 15 years, according to FactSet. Incredibly, 2020 was different: the average forecast was for a gain of about 5 per cent, but the S&P 500 ended up gaining roughly three times as much for investors. Who could have predicted markets would be shook by a pandemic and the worst global recession since the second World War, and yet end the year with above-average returns?

Nobel laureate Daniel Kahneman once pointed out that the correct lesson to learn from surprises is that the world is surprising. Alas, that lesson is never learned: as Housel puts it, "the iron rule of market forecasts is that bad forecasts do not deter faith in future forecasts".