Forecasts typically are cautious, going for average, and wind up outside the range of actual outcomes.
The typical S&P 500 forecast tends to be about the least likely to turn out to be accurate, according to an 87-year analysis by Jim McDonald, senior vice president and chief investment strategist, Northern Trust Asset Management, Chicago.
“Most strategists' annual forecasts fall in a range of 10% to 15%,” Mr. McDonald writes in an NTAM 2014 outlook report, released Dec. 19. But “the actual return has only fallen in that range 7% of the time historically” based on calendar years since 1926.
Only the zero-to-5% range of returns has occurred less frequently, at 6% of the time.
All the other ranges of returns have occurred more frequently in a distribution that “exhibits very fat tails,” Mr. McDonald writes.
The two most frequent sets of returns are any return less than zero, or negative returns, which have occurred 28% of the time, and returns above 25%, occurring 26% of the time.
In between, returns ranging from 5% to 10% occurred 10% of the time; from 15% to 20%, 13% of the time; and from 20% to 25%, 10% of the time.
Over the 87 years, the average annual return of the S&P 500 is 11.8%.
“If you are going to guess, go high or low!” Mr. McDonald concludes.