Who forecasts how?
One of the eternal debates in the investment world is whether professional forecasters and investors are better at forecasting market and stock returns than individual investors and corporate executives.
The debate over whether professional forecasters and investors can more accurately predict market and stock returns compared to regular individuals or corporate executives has been a long-standing topic in the investment world. A paper by David Thesmar and Emil Verner provides compelling evidence to support the notion that professionals often have a clearer understanding of these dynamics.
By analyzing a vast array of survey data spanning several decades, Thesmar and Verner have compiled a series of charts that showcase the relationship between actual past returns and anticipated future returns. The key takeaway from these visualizations is that professional investors, as represented by surveys like Value Line, the IBES database, and Robert Shiller, tend to adjust their return expectations inversely to past performance.
This means that when the market has performed poorly in the past, professionals tend to expect better returns moving forward, and vice versa. This pattern is consistent across various professional surveys, highlighting a shared tendency among these investors to anticipate a reversal in market trends based on historical performance.
In contrast, the forecasts provided by economists, as seen in the Livingstone Survey by the Federal Reserve Bank of Philadelphia, show a markedly different pattern. Economists consistently seem to disregard past returns, maintaining relatively stable return forecasts regardless of whether markets have experienced gains or losses.
This suggests a different approach to forecasting, where economists may view historical performance as less predictive of future outcomes. Surveys of individual investors and corporate CFOs, on the other hand, reveal a more conventional trend-following approach. Both groups exhibit a tendency to anticipate higher future returns when past returns have been above average, and lower expectations when past performance has been poor.
This behavior, while consistent, raises questions about the practicality and effectiveness of such forecasting methods, particularly for corporate executives who must provide accurate and reliable guidance to their stakeholders. In conclusion, the evidence presented by Thesmar and Verner underscores a significant difference in forecasting methodologies between professional investors, economists, and non-professional investors.
While professional forecasters demonstrate a strong correlation between past and future returns, economists and regular investors show a more erratic and less correlated approach. This disparity highlights the complexity of market forecasting and the varying strategies employed by different stakeholders in the investment landscape.
Written by urgent.news from Klement on Investing's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
