Each year, the biggest firms on Wall St. issue their S&P 500 price target within their Market Outlook. These annual reports are super compelling. They contain a breakdown of what is currently going on in the economy and markets, and they also lay out their case as to what they think will happen over the next 12 months.
These reports are written by highly educated professionals (think MBAs from Wharton, Harvard, etc.) who have worked in this industry for decades. They are somewhere near the top of the food chain at their respective firm, and they exude an air that they are “market prophets.”
To those that don’t know any better, it doesn’t get better than this. This is actionable information that can make you money.
However, if you follow my work, you know these projections are almost always way off target. And this year is no exception.
How Wall Street Did
I went back to see what major Wall St. firms predicted the S&P 500 would close at for this year.
Not surprisingly, not one firm was within 10% of the actual price. On average, Wall St. was 23% off target.
And here is what Wall St. is projecting for 2023, for what it’s worth.
Before I move on, for total transparency, here is what I wrote late last year for my market outlook leading into 2022.
I think I did a pretty good job of adequately outlining the risks we faced this year, namely that we were in an Everything Bubble, nothing looked attractive, and that inflation was a serious threat to all.
Did I predict that the S&P 500 would fall by ~20%? No. Did I know that bonds would post their worst year in history? No. Did I forecast that the U.S. Dollar would post a banner year? No.
There is a lot that I didn’t know, and that is okay. That is how this game is played. Instead, I focused on the various risks and how to minimize them (E.g., I avoided high-growth stocks and long-duration bonds). And as a result, our portfolio performed well, despite the number of risks present this year.
Predicting the Future is Hard
It is very, very difficult to accurately predict what the S&P 500 price will close at on the final trading day of next year. There are too many variables. Inflation. Interest Rates. The unemployment rate. The Ukrainian Invasion. China. Oil prices. The Dollar. Grain prices.
And the big variable people seem to overlook: unforeseen events. Even if you can somehow predict the outcome of all the known events that will happen in the world, which you can’t, you cannot predict the extremely rare events that are bound to happen.
Black Swans
We call these rare events black swans.
Black swans are 4 or 5-sigma events (extremely low probability – think back to your statistics class when you learned about distribution curves) that create catastrophic market impacts when they do occur. Making the situation even worse, these events are often portrayed as actually predictable when viewed in hindsight.
Great examples of black swans are the 1987 Black Monday crash, the September 11 attacks, and the COVID-19 pandemic.
Even though black swan events by themselves are rare, the sum total of all possible rare events make it not so rare. There is always some type of catastrophe or significant event that will temporarily derail the markets.
Even the best models in the world, created by some of the most brilliant minds this world has to offer, cannot consider all of the possible events and how they will impact asset prices.
My Kids S&P 500 Price Target
While I will assess the macroeconomy and the various markets every year in my Market Outlook, I won’t provide an S&P 500 price target. Instead, I thought it would be fun to let my two kids (11 and 14) provide their 2023 S&P 500 price targets (why not).
Emily, my 11-year-old, randomly came up with a $4,265 price target for 2023. This would imply a +10.7% return. Not bad.
Hayden, my 14-year-old, took this project a bit more seriously. I’m not sure what he did, but he did a lot of math (I think he factored inflation into his calculations) and came up with a price target of $6,625, a 72% return! I hope Hayden is right.
My 2023 Thoughts
For those that want to know my 2023 thoughts, here they are: I think a recession will happen in Q1/Q2 of 2023. This will initially have a negative effect on risky assets, bringing stock prices lower.
However, inflation will also fall (recessions are deflationary), forcing the Fed to not be so hawkish (as they have been) but to be more dovish and accommodative instead. This will be a tailwind for stocks, leading stocks to bounce before we reach peak unemployment. I think there is a decent chance that stocks will close out 2023 with a positive return.
But who knows.
What to Do Instead
Instead of trying to predict the unpredictable, stay invested in a diversified portfolio. It may sound simple, but it’s the best advice one can follow.
So many people make money in real estate because it is so difficult to sell and/or people want to avoid paying the tax on the equity. As a result, many people tend to hold onto these properties for decades, realizing a handsome return.
The same could be true for stock portfolios (stock returns are very similar to real estate returns over time), though most people panic and sell their stock positions too soon, limiting their upside returns.
So the lesson is this: nobody knows for certain what the economy or the markets are going to do in the short term, so don’t get cute with your investment portfolio. Instead, stick to your investment philosophy (if it’s a good investment philosophy – if it’s not, you need to fix this ASAP) and understand that volatility is the price one must pay if you want attractive returns.
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