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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 clear idea of how stocks will perform in the future.
Here’s the thing: They are almost always wrong.
What is happening: Last year, Goldman Sachs analysts predicted that the S&P 500 would close 2022 at 5,100 points. Morgan Stanley predicted a more bearish 4,400. The S&P 500 closed Tuesday at 3,829.
No major analyst predicted last December that this year would (probably) be the worse for US stocks since 2008, that Oil prices would shoot from $70 to $130 and then back to $70, and that the Federal Reserve would announce four consecutive history increase in interest rates by three quarters of a point.
Geopolitical chaos, global pandemics and extreme weather events have created unexpected and outsized headwinds, creating extremely turbulent courses for markets.
“As they reflect on this year, investors should exercise a sense of humility as they peer into the next,” Christopher Smart, chief global strategist at Barings, wrote in a recent note. . “They can take comfort that outside of US intelligence circles, hardly anyone expected a Russian invasion last December. But that will be cold comfort in the face of tough markets and evanescent returns. »
Most analysts seem to expect inflation risks to subside next year, dragging the economy into a mild recession and eventual recovery – but they’re still asking investors to wear their seatbelts to at any time, in the event of an unexpected shock along the way.
With those caveats, let’s get to the Wall Street predictions
Numbers: forecasts for where the S&P 500 will end 2023 vary widely. Below is a roundup of estimates made by five major banks, reported in year-end notes and reports. You can see that they are hovering widely around 4000. (Note: these predictions are subject to change).
- Barclays: 3,725
- City: 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 previous 20 years (2002-2021), the average difference between target price estimates by industry insiders at the start of the year and the final index price for the same year was 8. 3%, according to a FactSet report.
Analysts have overestimated the final value (i.e. ending value below estimate) for 13 of the 20 years and underestimating ending value (ending value above estimate) for the other 7 years.
This year, forecasters are expected to miss the target by their widest margin in about 15 years, according to FactSet data. They are on track to have overestimated the performance of the S&P 500 in 2022 by almost 40%.
Market analysts are great at explaining what drives stocks in the short term, but forecasts clearly haven’t been their cup of tea – nor should they really matter to investors. The S&P 500 has had good years and bad years, but long-term investors know that usually works at the end: The average return has been about 10% per year for almost the last century.
It was a very bad year for the markets, but investors held out hope for a year-end boom that would lift stocks into the new year. Now it appears that Santa Claus won’t come to townafter all.
What is happening: Markets often jump at the end of the year – a final treat for investors at a time when market volume and volatility are relatively quiet.
Technically, the “official” time for a Santa Claus rally is the trading week between Christmas and New Year’s Day, but analysts say Saint Nick is unlikely to reward investors with a nice big rally. until the end of the year.
During this period, the S&P 500 has historically gained 1.3% on average, according to LPL Financial data dating back to 1950. The average return for all rolling seven-day periods is just 0.2%.
Trading activity is often low during Christmas week as institutional investors take the day off. This gives more opportunities to retail investors, that swing bullish, to influence the markets. Bonuses and holiday gifts also provide additional cash to invest in the stock market.
If the S&P 500 ends higher in this year’s Santa Claus rally, it would mark the seventh consecutive period of positive returns in the final week of the year.
Lump of coal: Not long ago, it looked like Santa Claus was coming early this year when the S&P 500 rebounded 14% in four weeks. Then on Friday, at the start of this seven-day Santa Stretch, markets closed higher – the S&P 500 gaining 0.6%.
But on Tuesday, traders received a piece 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 carried away with the holiday cheer, said Scott Wren, senior global markets strategist at Wells Fargo. “It may sound like Ebeneezer Scrooge, but sometimes all that joy needs an eggnog reality check and this can be one of those times,” he said.
Rate hikes will continue, he said, and the economy will likely stumble in the coming months along with the markets. “Santa Claus is coming to town, but we think he’s unlikely to reward investors with a big rally in stocks until the end of 2022.”
China-related stocks surged after Beijing took a major step in reopening its economy this week.
Beijing will drop quarantine requirements for international travelers from January 8. These changes come after nearly three years of isolation and painful limitations.
Chinese companies that trade on the Nasdaq were among the best performers on Tuesday. JD.com and Baidu gained more than 4%. The Golden Dragon China Index, which tracks Chinese companies on US stock exchanges, rose about 2%.
Inbound travelers will only be required 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. Currently they are subject to five days of hotel quarantine and three days of self-isolation at home, report my colleagues Yong Xiong, Xiaofei Xu and Nectar Gan.
Airline restrictions on the number of international flights and passenger capacity will also be removed, according to the announcement.
China has sealed its borders since March 2020 to prevent the spread of the virus, maintaining itself in global isolation even as the rest of the world has reopened and exited the pandemic.
Foreigners have been largely banned from entering China except for a limited number of business or family visits. The NHC said it would further “optimize” arrangements for foreigners to travel to China for business, professional, study or family reasons and “provide convenience” for their visa applications.
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