My prediction for 2015 is that the vast majority of predictions will be wrong and that the biggest surprise will be something that no one saw coming.
Predictions can be fun and it is a tradition for analysts, market pundits and random people you meet at holiday parties to try to guess what the market and the economy will do for the next 12 months. But is it of any real investment value?
The analysts on CNBC Friday morning were deadly serious about justifying why the S&P 500 was going to be up 11% vs. 6%, as someone else predicted. These experts like to think it is a very scientific process rather than something they just pull out of thin air.
One problem with predications at the end of the year is that it is an outgrowth of natural optimism that people tend to cultivate as they look ahead and hope for the best. It is human nature to be optimistic at this time of the year, which gives most of the predictions we see a positive bias.
The main thing to keep in mind about all these year-end guesses is that are primarily made for entertainment purposes. Of course if someone is lucky enough to make a good guess, he or she will make it sound as if it were due to superior insight and great intellect, but all you really need to know is that no one has consistently been able to predict the market a year in advance. There are always some folks who are fairly close, but no one does it year after year.
Even if you do tend to embrace some of these predictions, there still is the issue of how you capitalize on them. Do you simple buy and hold the S&P 500 because pundits say it will have another positive year? These predictions don't relieve us of the hard work of figuring out how to act on them and, more importantly, we have to be even more careful about having an exit plan should something not occur as predicted.
I don't want to sound overly grumpy about this game of predictions. It is mostly done with a fun spirit and most people don't take them very seriously. It actually can be helpful to contemplate various scenarios. No one can know for sure what will happen to oil, for example, but it is interesting to consider what will happen and how we might profit as events play out.
If, like me, you tend to use a reactive approach to the market rather than an anticipatory one, then year-end predictions are of even less useful, but it still can help you react faster if you are aware of various scenarios. Enjoy the predictions and maybe even spend some time making your own, but think of them as starting points for potential trades down the road and not something that merits any action at all right now.