Bank Analysts Dead Wrong (Again) With Their 2010 Stock Market Predictions

Around the turn of the year banks and wealth managers publish their forecasts for the development of the major stock indexes in the new year. Most of them conclude them with the prediction of the index level at year-end closing. Media coverage for these forecasts is guaranteed, accuracy, however, not at all, as a recent analysis shows.

End of last year an analyst team at HSBC has researched the forecasts for the Germany’s DAX Index provided by more than 30 banks, wealth managers and fund issuers for the years 2007 to 2009 and compared them with the actual year-end numbers. The results are disillusioning: The average prognosis and the actual year-end closing differed from each other by up to a stunning 45% and only in one of the last three years did four banks, out of 36, manage to predict the correct range. And the forecasts for 2010 have proved once again that the accuracy of analysts’ forecasts is so far out it’s embarrasing: end 2009 the average prediction for the closing of the DAX in 2010 was 6217 points, ranging in most forecasts between 6000 and 6600 points. The actual close of the Dax on December 31^st was 6915 points. Only one out of 10 analysts predicted a closing level in the range of 6800 to 7000 points.

The detailed analysis as displayed in the table below shows for 2007 a range in the forecasts of more than 3,000 points; a difference between the forecast and actual year-end number of 15% with no commnetator predicting the correct range for the year-end closing. 2008 has been a disastrous year for all predictions: after a far better than forecasted year 2007 the optimism went through the roof and the banks and wealth managers forecast for 2008 a year-end closing of the DAX at a minimum of 7,700 points with a maximum of 10,250 points. In reality the DAX closed 2008 at 4810 points, 45% below the average forecast. After these over confident and entirely wrong forecasts, projections for 2009 became more accurate, but on average still missing the real closing number by 12%. In 2010 again the predictions were on average 11% wrong.

Not surprisingly, the predictions of a stock markets performance, let alone the forecasts of precise index points, is impossible and instances of analysts hitting the bull’s eye  should be attributed to luck rather than to knowledge. Otherwise there would be a lot more billionaires around. Analysts are human, they tend to be too pro-cyclical in their forecasts and by and large avoid taking a stand far from their peer group.To be fair, none of them claims to have absolute knowledge nor do they give a guarantee. Media and investors ask for forecasts and the more precise so much the better, but in consequence they should take them with a grain of salt.

A take-away for investors is that stock markets can perform far better, but also far worse than “everybody” expects. Even the extreme ranges of forecasts do not provide limits in real life and, as 2008 demonstrated, not only a few, but all of the analysts can be completely wrong. Investors should take stock market forecasts as an indicator of general opinion and not the market’s future path. They are advised not to underestimate the volatility of markets and how low or how high, respectively, a bear market or a bull market can go, no matter  what the predominant opinion is.

According to a recent analysis the average prediction for the closing of the DAX in 2011 is 7520 points, ranging in most forecasts between 7400 and 7700 points. If the results of the last years can provide any guidance it would not be surprising if the DAX closed this year either below or above this range.