If the definition of insanity is to do the same thing over and over, expecting a different result, then swaths of Wall Street’s community of stock analysts, economists and bond strategists need to be committed.
The season of year-ahead outlooks is now upon us, but despite the sweat and mental anguish many analysts have surely expended on their forecasts, most of them look like they could have been lifted from their 2016 vintage. Or from 2015. Or 2014.
Not all the forecasts have been published, but enough to see that the consensus view is remarkably familiar. The median analyst forecast is for the Fed’s favoured inflation measure to quicken from 1.5 per cent to 2 per cent by 2019, the 10-year Treasury yield to climb to almost 3 per cent by the end of 2018, and the S&P 500 to gain another 7 per cent to hit 2,825 points.
Take JPMorgan as a fairly typical example. Its analysts reckon that faster inflation, and tighter monetary policy in the US, Europe and Japan will have “material consequences” for fixed income. In other words, a 2 per cent annual loss for developed market bonds, the worst performance since 1994.
The problem is that this is, in broad terms, what most analysts have wrongly been predicting for years. Year after year, inflation has stayed stubbornly well-behaved, the Fed has tiptoed forward and bonds have repeatedly defied the naysayers.
Of course, journalists should be wary of throwing stones in glass houses. Analysts can often get their numeric forecasts wrong while nailing the broad sweep of their forecasts (or the opposite). Much-maligned annual outlooks are still a useful mental exercise and a handy excuse to take a step back and revisit assumptions.
Next year could indeed be different. The global economy is in good shape and inflation should eventually stir. The Fed might actually decide to quicken its pace.
The long-promised bond bear market may, in fact, be around the corner. Perhaps volatility really is a coiled spring that will tear through financial markets in 2018. But the record of Wall Street’s finest minds is pretty underwhelming.
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