Market Predictions for 2021 and Why To Ignore Them

by | Jan 19, 2021

Every year, investment advisors & other financial “experts” release their market predictions for the upcoming twelve months. Many investors listen. However, these predictions are frequently and sometimes drastically wrong.

It’s 2021 and you’re looking for a great start to the year in your portfolio. What better way to do so than to research what the financial experts of the world are saying about 2021 and adjust accordingly? It sounds like a reasonable strategy. However, despite these “experts” releasing incorrect predictions year after year (and they all have), they continue to share their opinions as if their missteps never happened.

Then, the unsuspecting investors that take these predictions as gospel fall into strategy traps like marketing timing or overweighing to precious metals (like gold and silver). Ultimately, this hurts the average investor in the long run.

So, before you put too much “stock” into the predictions swirling around about 2021, let’s take a look at what these market analysts had to say about 2020, and how those predictions turned out.

Getting It Wrong on 2020 Outlooks

According to a Financial Advisor IQ article, Darrell Cronk, the President of Wells Fargo’s Investment Institute and Chief Investment Officer for the Bank’s Wealth Management Unit, said Wells Fargo did not believe a recession would happen in 2020.1  He also mentioned in an outlook published by Wells Fargo that his Economics team predicted global economic expansion would continue in 2020, while we actually saw a 4.3% contraction, due to the Coronavirus pandemic.2, 3

The report published by Wells Fargo also called for “modest gains for all major equity classes.” However, according to NovelInvestor.com, equity returns included 20% for small cap, 18.7% for emerging markets, and 18.4% for large cap. International stocks performed the worst with a return of 8.3%, which hardly qualifies as only a modest gain.4

But, Wells Fargo certainly wasn’t the only financial institution to swing and miss on their predictions. Nearly every firm on Wall Street puts out predictions every year, and many of them are wrong.

Franklin Templeton published a report stating that a recession was unlikely in 2020. To their credit, they did state optimism for remaining invested in equities in 2020.5

Morningstar Research mentioned that “tech stocks were on fire in 2019, and we don’t see much value in the sector today” (January 3, 2020). The SPDR tech ETF (XLK) was up 43.61% in 2020, according to Morningstar and Yahoo Finance.6

Failure on Post-COVID Market Predictions

Aside from sharing the fact that they were incorrect, the early-2020 predictions mentioned above shared one other major thing in common. None of them mentioned COVID-19. And, if you guessed that the predictions for the remainder of 2020 would improve after having the knowledge of the pandemic, you’d be wrong.

Barron’s

On March 25th of 2020, Barron’s published an article entitled Why the Stock Market Hasn’t Hit Bottom and Could Fall Another 35%.7 That article did not age well.

From March 26th – December 31st of 2020, the S&P 500 not only avoided a 35% decline but gained 42.81% (according to Yahoo Finance charts).8 The difference between the prediction cited in the Barron’s article and what really happened was an astounding 77.81 percent! Hopefully, investors did not sell because of that article. Sadly, I am sure many did.

Business Insider

Unfortunately, Barron’s was certainly not alone in publishing fear-ridden predictions like the one above. On March 26th of 2020, Business Insider published an article titled S&P at upward limit and could fall 30% more.9

Of course, anything on the internet is accessible to millions of people, but both of these articles were placed front and center on my “Stocks” smartphone app, the same app that comes standard with every iPhone. Therefore, both articles undeniably had incredible reach with everyday investors.

In fact, I would argue these articles and the opinions expressed in them were likely the most prevalent voices and opinions for some of those millions of readers. But wait, there’s more.

Jim Cramer

Stock guru or media personality? You can decide for yourself. But, in March of 2020, Jim Cramer was asked about his view on the markets and spewed a wide array of financial lingo before calling the strong market performance of March 24th, 2020, a one-day bull market. He also stated the market surge on March 24th was simply a result of a dysfunctional market and the rally was largely due to machine-trading.10

Since that interview, which you can watch here, the S&P 500 has appreciated approximately 55.67% (through January 13, 2021).

Nuveen

Nuveen publishes 10 market predictions each year and they, too, missed the market on a few key calls.

Before bashing them too much, I must mention that Nuveen actually scores their own predictions right on their website. At least they acknowledge their own inaccurate “insights.”

With that said, Nuveen predicted the 10-year U.S. Treasury yield would end 2020 above 2%. However, the yield on the 10-year ended under 1%. They gave themselves half-credit for that prediction, which seems fairly generous and confusing, but let’s move on.

Nuveen also predicted that stocks, bonds, and cash would all return less than 5% for only the fourth time in 25 years. Per their admission, both stocks and bonds returned over 5%, and by no small margin. Stocks, as measured by the S&P 500, were up over 18% in 2020.11

What is Being Said About 2021?

Despite their failures year after year to predict the exact movement of the market, the “experts” are back at it again, sharing what they’ve seen in their proverbial crystal balls. According to CNBC’s Market Strategist Survey, 12 of 20 strategists are predicting that U.S. stocks will gain somewhere between 18% and 22% in 2021.12

Four are predicting stocks return between 0% and 4%, and four are predicting stocks will lose between 4% and 20%.

One question comes to mind when reading predictions like these. Why?

Why do these institutions continue to publish outlooks knowing that they have no clue what to expect in the stock market? In 2020, we saw a perfect example of how unpredictable the market can be. To pretend you know what the future holds for the broad markets is nothing less than a bold-faced lie.

And, if readers acknowledge that it is impossible to know and tell the future, why are we so interested in what these market guessers have to say?

I don’t know.

Predictions vs. Strategy

“I don’t know” should, in fact, be the same answer given when anyone asks “What is the market going to do this year?” Why? Because nobody does know. The reason that these institutions give these predictions is likely so they can get marketing exposure or perhaps it may be that the public (or their clients) expect them to give a prediction. They are financial experts after all, right?

Hardly. According to The New York Times, the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points.13  That level of inaccuracy makes your weatherman look like an oracle.

However, predictions are much different than strategy. Based on the data above, it’s clear to see the dangers of basing your strategy on these predictions. While it can be tempting, investors must remind themselves that just because a large Wall Street firm is noted in a headline, it doesn’t mean you should listen to what they have to say.

What is an Investor to Do?

If investors make the prudent decision to ignore financial headlines and market predictions, how should they make their own investment decisions?

I would argue that your investment allocation should be based on your personal situation, including factors like your risk tolerance and proximity to retirement. That allocation should not change just because the financial pundits are calling for market volatility. Despite being well circulated, the thought that you need to avoid all market downturns to be a successful long-term investor is simply not true.

In fact, understanding your time horizon might be the most important part of building your portfolio’s allocation. Are you investing for the short-term or long-term, or perhaps a bit of both? Understand that stocks are not ideal for short-term time periods because of their volatile and unpredictable short-term nature. Cash is not ideal as a long-term investment because of its low expected rate of return.

Creating a strategy that is based on your financial plan can help remove the guesswork, remove stress, and carry you through market ups and downs.

Bottom Line

Don’t read the headlines. Tune out the financial experts. Create a financial plan, either yourself or with the help of a CERTIFIED FINANCIAL PLANNER™ professional and stick to it. My prediction is that if you do that, you’ll give yourself the best chance of success.

 

Sources

1. Financial Advisor IQ; https://www.newsbreak.com/news/1483252368008/wirehouses-downplay-recession-odds-in-2020-outlooks
2. Wells Fargo; https://stories.wf.com/2020-investment-outlook-investor-resiliency-required/
3. SPGlobal.com; https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/global-gdp-growth-in-2021-could-be-limited-to-1-6-on-vaccine-delay-8211-world-bank-61978948
4. NovelInvestor.com; https://novelinvestor.com/asset-class-returns/
5. Franklin Templeton; https://www.franklintempleton.com/investor/article?contentPath=html/ftthinks/en-us-retail/gio/coping-with-a-changing-market-landscape.html
6. Yahoo Finance; https://finance.yahoo.com/quote/XLK/performance?p=XLK
7. Barron’s; https://www.barrons.com/articles/why-the-s-p-500-hasnt-hit-bottom-and-could-fall-another-35-51585169263
8. Yahoo Finance: https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC&.tsrc=fin-srch
9. Business Insider: https://markets.businessinsider.com/news/stocks/stock-market-outlook-sp500-upward-limit-coronavirus-risks-societe-generale-2020-3-1029037184
10. Jim Cramer CNBC Interview; https://www.youtube.com/watch?v=zFqF9QWZnS8
11. Nuveen; https://www.nuveen.com/en-us/thinking/investment-outlook/ten-predictions
12. CNBC; https://www.cnbc.com/market-strategist-survey-cnbc/
13. The New York Times; https://www.nytimes.com/2020/12/18/business/stock-market-forecasts-wall-street.html

Joe Allaria, CFP®

Joe Allaria, CFP®

As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.

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