The Forecast Article To Shake Your Belief in Forecasts

The Forecast Article To Shake Your Belief in Forecasts

By Jack Forehand, CFA, CFP® (@practicalquant) —

We have just reached the end of 2021 annual forecasting season. It is the time of year when market strategists tell you where the market will go this year, what will happen with the economy, where inflation is headed and what types of stocks will lead the way in the new year. These forecasts will typically be provided with a level of conviction that makes you believe that there is a high probability that they will be correct. They will even include exact targets for things like the return of the S&P 500. But If history is any guide, that confidence will be far from justified.

It isn’t just Wall Street strategists that think that they can predict things that they cannot. Most of us do it too. I have opinions on all the things I listed above. And the level of confidence I have that I will be right far exceeds the actual probability. I became a quant investor because I accepted this fact, but the fact that I don’t put these predictions into practice doesn’t mean that I don’t have unrealistic expectations about the chances they will be right.

To try to continue to prove to myself that forecasting is a waste of time, I have decided to make an annual tradition out of listing my own annual forecasts. And to limit my urge to change them after the fact, I decided to do it publicly via our blog. That way I can look back in the future and not only see how wrong I was, but also see the flaws in my reasoning that led to my mistakes.

So here is my first annual forecast article. If anyone was considering me for their Chief Market Strategist position before, I can promise you they likely won’t after they see the end result of these.

[1] The S&P 500 Will Lose 5% in 2022.

I am one of these fundamental value guys who has been saying the market is overvalued for a long time now. So why not double down on that and say that this is the year I will finally be right. I think the reduction in both monetary and fiscal stimulus will be a challenge for the market this year and should lead to a more difficult environment.

[2] Volatility Will Rise in 2022.

The new market regime has been characterized by extended periods of lower volatility and drawdowns coupled with shorter bursts of major volatility and significant drawdowns. Last year wasn’t a low volatility year (the VIX averaged 19.6), but it did see a significant decline in volatility relative to 2020 when the VIX averaged over 24. We also didn’t see anything close to a 10% drawdown in 2021. I think that changes in 2022 and we see an average VIX above 21 and two 10% corrections during the year.

[3] Inflation Will Be Higher Than Consensus in 2022

Now that I have declared myself a market forecaster, I might as well make myself an economist too. After all, I have to assume my undergraduate Economics degree from 1999 more than qualifies me for the job. So I will say that PCE inflation for 2022 will be at least 1% above the Fed’s target.

[4] Value Stocks Will Lead the Market in 2022

There is no better way to finish off my first annual forecast than to talk my own book. Although it looked like value was back after the 2020 bear market, we have now headed in the opposite direction with growth stocks leading the way again. I think the combination of a strong economy, higher than expected inflation and low relative valuations changes that in 2022. I will predict that small-cap value (I will use the AVUV ETF as my proxy) will beat the S&P 500 by over 10% in 2022.

So there you have it; my first list of annual predictions that are almost certain to be far from the reality of what happens. If I was smarter, I would have used this article to predict a major market crash because if the small chance I ended up being right became a reality I could have used that fact to launch a doom and gloom newsletter to profit from my unique forecasting ability. But I decided to predict what I actually think will happen instead. If these predictions prove to be mostly wrong, I am hoping it will help me reenforce my belief that this whole process is a waste of time. If not, I will use my newfound confidence to make more predictions next year which inevitably will end up being wrong. Either way, I plan to enjoy the ride of being a newly minted market forecaster.

Happy New Year to everyone and thank you for reading my articles in 2021. I will be taking off my market forecasting hat and returning to hopefully producing valuable content next week.

Jack Forehand is Co-Founder and President at Validea Capital. He is also a partner at and co-authored “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Jack holds the Chartered Financial Analyst designation from the CFA Institute. Follow him on Twitter at @practicalquant.