When you predict the same thing will happen to the stock market year after year, eventually you’re going to be wrong.
That’s what happened in 2018 to Wall Street strategists, whose perennial optimism about U.S. equities got bushwhacked by the worst fourth quarter in a decade. In January, the group predicted the S&P 500 would end 2018 at 2,893, on average, translating to an 8% gain. Instead, the benchmark index dropped 6% to finish just above 2,500. The almost 400-point gap is the biggest since the 2008 financial crisis.
Big misses when stocks fall are a predictable outcome for strategists, who since the start of the century have never forecast a down year in U.S. equities. Although obviously nothing to brag about, it also bespeaks a propensity to tailor the outlook around what usually happens — that is, stocks going up.
“It’s not a particularly courageous prediction because when people are saying the market is going to be up 8%, they’re basically saying it’s going to be an average year,” said Eric Kuby, chief investment officer who helps oversee $1.4 billion at North Star Investment Management in Chicago. “Looking back at 2018, it’s anything but average. It’s a very disappointing year.”
Blame a fourth-quarter sell-off that ruined a year that before October had gone pretty much according to plan. At a record 2,930.75 in September, the S&P 500’s year-to-date gain stood at almost 10%.
Then the market plunged, sending the benchmark to the brink of a bear market as fears of a recession crept up amid intensified U.S.-China trade tensions and a fourth interest rate increase by the Federal Reserve. Strategists, who had rushed to raise their forecasts amid one of the best starts of a year ever, saw their bullish calls steamrolled.
The closest that any of the strategists followed by Bloomberg came to the 2018 close was 140 points.
“If we had this conversation at the end of the third quarter, they would have gotten an A” on the report card, said Tom Wirth, director of wealth management for Chemung Canal Trust, which manages $1.9 billion in Elmira, N.Y. “The market wants to go higher over the long term, always. It’s just it has periods that it doesn’t, and predicting when that’s going to be is the most difficult thing to do.”
At least four strategists have reduced their projections for this year, including Barry Bannister at Stifel Nicolaus, Jonathan Golub at Credit Suisse, Noah Weisberger at Sanford C. Bernstein, and Chris Harvey at Wells Fargo.
Still, even after the downward revisions, their overall bullish stance remains intact. All of the 22 strategists tracked by Bloomberg see higher prices over the next 12 months. At 2,975, the average estimate points to a 19% gain from Monday, a prediction that’s more optimistic at this time of year than any since at least 1998.
True, the steepness of the trajectory partly reflects how far stocks just fell. After all, the mean forecast is only 40 points away from the all-time high.
At the same time, the prediction is consistent with their propensity to lean bullish — during the last two decades, strategists have uniformly seen gains in the S&P 500, with the average annual forecast coming in at 9%.
Most of the strategists view the three-month plunge that had erased more than $7 trillion from equity values at its worst point as overdone. While the earnings machine that has powered the bull market toward its 10th anniversary is poised to decelerate, there are few signs of a collapse. With the tax cuts largely reflected, profit growth will slow to half the pace seen in 2018 over the next two years. But at an average 10%, it’s pretty much in line with the historic rate since 1998.
“We see increasingly negative sentiment setting the stage for upward surprises in 2019,” John Stoltzfus, chief investment strategist at Oppenheimer & Co., wrote in a note to clients Monday, initiating a year-end target of 2,960 for the S&P 500. “We believe the U.S. economy remains on solid footing despite risks and uncertainties derived from trade concerns.”