How to Get Your Market Predictions Right

A new year is coming soon. And as always, economists and analysts alike love to make predictions about what’s going to happen in the financial markets over the next 12 months.

Here are some of the highlights.

1. Kiplinger’s personal finance senior editor has the following prediction about the U.S. stock market: “A conflicted bull market may be experiencing a late-life crisis, but it’s not headed for a total breakdown yet.”

2. Analysts from famous Wall Street firms mostly see single digit returns for the U.S. stock market in 2015.

3. However, Oppenheimer’s John Stoltzfus is a lot more optimistic: He predicts the S&P 500 index might appreciate more than 10% to 2,311 in 2015 from its current level of 2,089.

4. In our local market in Singapore, most brokerage houses have also issued their predictions for the Singapore market in 2015 as highlighted here by my colleague Chong Ser Jing. Apparently, the Singapore market is now “cheap” and UOB Kay Hian, a brokerage firm, has a target of 3,600 points for the Straits Times Index (SGX: ^STI) in 2015.

For some perspective, the SPDR STI ETF (SGX: ES3) – an exchange traded fund which tracks the Straits Times Index – carries a trailing price/earnings ratio of 13.5 currently and the benchmark index is at 3,363 points at the moment.

5. My personal favourite is from famed economist Nouriel Roubini. He says that the US is in an asset bubble again but it would not pop until 2016. But before local investors in U.S. stocks start fleeing for the “Exit” sign, do bear in mind the following: Mr. Roubini has made numerous short-term predictions about the market and the odds of him getting things right is slim.

He has made bearish comments about the U.S. stock market in 2006, 2007, 2008, 2009, 2010, 2011, 2012, and 2013. And where was the S&P500 at the start of 2006? 1,270 points.

I always view market predictions as a source of entertainment rather than a source for deep investing insight. The truth is, as much as we hope we have the power to see the near future, we don’t. So rather than wasting our time trying to predict what the market is going to do over the short-term every year, there is some other more constructive type of market prediction we can make. And that is, to visualize where the market may be over the next few decades.

Will Singapore’s economy be bigger over the next 50 years? Will the world become a more globalized and connected place in the next 50 years? Even though we might not be able to see what is going to happen next year, it seems rather clear to me that over the next half-century, we should see a much more prosperous world than we see today.

So we have two options for getting market predictions right.

The first is to be like Mr. Roubini, holding the same view in every single year – that way, we’re bound to have our “prediction” proved right some time down the road. But as they say, even a broken clock can be right twice a day.

The second is to remain focused on the long-term. Seeing how human civilization has evolved throughout history, I’m quite sure the next century will be better.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned above