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December is a month full of market forecasts for the coming year. Everyone from economists to analysts to grocers seems to have a strong sense of how stocks will behave in the future.
Here’s the thing: They’re almost always wrong.
What’s happening: Last year, analysts at Goldman Sachs predicted the S&P 500 would close 2022 at 5,100. Morgan Stanley had forecast a more bearish reading of 4,400. The S&P 500 closed at 3,829 on Tuesday.
None of the major analysts predicted last December that this year would be (probably) the worst for US stocks since 2008, that oil prices would rise from $70 to $130 and then fall back to $70, and that the Federal Reserve would four would herald historical events in succession Rate hikes by three quarter points.
Geopolitical chaos, global pandemics and extreme weather events have generated unexpected and outsized headwinds and tailwinds – creating extremely turbulent rides for the markets.
“With this year’s record, investors should exercise some humility as they look to next year,” Christopher Smart, Barings’ chief global strategist, wrote in a recent statement. “You may take comfort that, outside of US intelligence circles, almost no one expected a Russian invasion last December. But that will be little consolation in the face of difficult markets and dwindling yields.”
Most analysts appear to be expecting inflationary risks to ease over the next year, taking the economy into a mild recession and eventual recovery – but they still urge investors to buckle up in case of unexpected obstacles along the way.
With those caveats, let’s move on to Wall Street’s forecasts
The payment: forecasts where the S&P 500 will end up in 2023 varies greatly. Below is a summary of the five major banks’ estimates presented in the notes and financial statements. You can see they’re mostly hovering around 4,000. (Note: These predictions are subject to change).
- Barclays: 3,725
- Cities: 3,900
- Bank of America: 4,000
- Goldman Sachs: 4,000
- JPMorgan: 4,200
The bottom line: Take these predictions with a grain of salt.
Over the past 20 years (2002-2021), the average difference between industry insiders’ price target estimates at the start of the year and the index’s closing price for the same year was 8.3%, according to a FactSet report.
Analysts overestimated the final value (ie terminal value was below estimate) in 13 of the 20 years and underestimated terminal value (terminal value was above estimate) in the other 7 years.
Forecasters will miss the widest range mark in about 15 years this year, according to FactSet data. They’re on track to overstate the performance of the S&P 500 by nearly 40% in 2022.
Market analysts are great at explaining what’s driving stocks in the near term, but forecasts were clearly not their thing — nor should they really matter to investors. The S&P 500 has good years and bad years, but long-term investors know that it usually works out in the end: The return has hovered around 10% per year for most of the last century.
It’s been a very bad year for markets, but investors have been hoping for a year-end boom that would send stocks higher into the new year. Now it looks like Santa Claus isn’t coming to town after all.
What’s happening: Markets often rise at the end of the year – a last gift for investors at a time when market volumes and volatility are relatively calm.
Technically, the “official” time frame for a Santa Claus rally is the trading week between Christmas and New Year’s, but analysts think it’s unlikely that Saint Nick will reward investors with a nice big year-end rally.
During that period, the S&P 500 has historically gained an average of 1.3%, according to data from LPL Financial dating back to 1950. The average return for all rolling seven-day periods is just 0.2%.
Trading activity is often low during the Christmas week as institutional investors take time off. This gives retail investors who swing bullish more opportunities to influence the markets. Bonuses and Christmas gifts also offer extra money to invest in the stock market.
If the S&P 500 finishes higher during this year’s Santa Claus rally, it would mark the seventh consecutive positive period in the final week of the year.
piece of coal: Just recently, it was looking like Santa was coming early this year, as the S&P 500 gained 14% in four weeks. Then, on Friday, the start of that seven-day Santa Stretch, markets closed higher — with the S&P 500 gaining 0.6%.
But on Tuesday, traders received a lump of coal. Wall Street ended lower at the start of the holiday-shortened week.
It’s important to look at fundamentals and valuations before getting into the holiday spirit, said Scott Wren, senior global market strategist at Wells Fargo. “It might sound like Ebineezer Scrooge, but sometimes all that cheering along with the eggnog needs a shot of reality and this could be one of those cases,” he said.
Rate hikes will continue, he said, and the economy is likely to stumble along with markets in the coming months. “Santa Claus is coming to town, but we think he’s unlikely to reward investors with a major stock rally until the end of 2022.”
China-related stocks rose sharply after Beijing took a big step towards reopening its economy this week.
Beijing will lift quarantine requirements for international travelers from Jan. 8. These changes come after almost three years of isolation and painful restrictions.
Chinese companies traded on the Nasdaq were among the top performers on Tuesday. JD.com and Baidu were up more than 4%. The Golden Dragon China Index, which tracks Chinese companies on American stock exchanges, rose by around 2%.
Those arriving only need to show a negative Covid test result obtained within 48 hours of departure, China’s National Health Commission (NHC) said in an announcement late Monday. They are currently subject to five days of hotel quarantine and three days of self-isolation at home, my colleagues Yong Xiong, Xiaofei Xu and Nectar Gan report.
According to the announcement, restrictions on airlines on the number of international flights and passenger capacity will also be lifted.
China has sealed off its borders since March 2020 to prevent the spread of the virus and has remained in global isolation even as the rest of the world reopened and moved away from the pandemic.
Foreigners have largely been banned from entering China, save for a limited number of business or family visits. The NHC said it will continue to “tweak” arrangements for foreigners to visit China for work, business, study or family reasons and provide “convenience” for their visa applications.