All You Need to Know About the “2016 Stock Market Crisis”

It’s that time of the year again.

And no, I’m not referring to Thanksgiving. Rather, it’s the time of the year when economists and Wall Street strategists start predicting stock market returns for the coming year.

There’s a wide spectrum of predicted outcomes for the stock market in the year ahead. Some economists are forecasting a stock market crisis of epic proportions. Other pros are expecting double digit returns next year.

These predictions may all sound very convincing, being built on what seems to be logical premises. But here’s the rub – it turns out that most predictions are not very good.

The market that didn’t rally

Around the same time last year, some Wall Street strategists were predicting double-digit rallies for the S&P 500, the U.S. stock market’s equivalent to our Straits Times Index (SGX: ^STI) here. One strategist even put his neck out and said that the U.S. index will end 2015 with a 12% gain at 2,311 points.

The problem? The S&P 500 closed at 2,086 yesterday, up a mere 1.4% since the end of 2014.

We are not quite at the finish line yet, but the gap between the predictions and current reality does highlight the futility of trying to make precise guesses on where the stock market will be at a particular date. This futility applies to stock markets around the world.

It is worth repeating what financial journalist Jason Zweig wrote in his book “Your Money and Your Brain”:

“Every December, BusinessWeek surveys Wall Street’s leading strategies, asking where stocks are headed in the year to come. Over the past decade, the consensus of these “expert” forecasts has been off by an average of 16%.

According to money manager David Dreman, over the past thirty years the analyst’s estimate of what companies would earn in the next quarter has been wrong by an average of 41%.”

As Zweig mentioned, Wall Street predictions have traditionally underwhelmed. Investors trading around these predictions may find out that they miss the mark by a great deal.

Foolish summary

Stock market forecasts have been happening for a while, as alluded to by Zweig above. It is also likely to continue in the future. Our job, though, is to keep our eyes on the things that really matter.

And that is, the long-term development of the businesses behind the tickers.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.