From Wet Bias to Market Bias: Navigating Unreliable Predictions

Forecasters want to be right. They also want people to be happy with their forecasts. Think about the “Wet Bias” in weather. Meteorologists often say there is a higher chance of rain because no one wants to get wet when they’re told it would be sunny and dry.

When you check different stations, the forecasts are usually similar. If one says its going to be 20 degrees with snow while another says its going to be 60 and sunny then one of the forecasts would have little credibility.

Last year the S&P 500 returned 23.3%. Yet, when analysts made their 2024 predictions in late 2023 they were all over the map. Some were optimistic, while others were very negative. One analyst even predicted that the market would experience its worst crash since the 2008 financial crisis.

This variability highlights how unreliable these predictions can be and why they should have little influence on your financial plan.

Analysts arrive at different expectations because they view the world differently and have different biases. It seems as if there is always a reason to be bearish, to think that a market crash is lurking around the corner. This fear of loss is often driven by cognitive biases such as loss aversion where investors place greater emphasis on avoiding losses than on achieving gains.

This is why having a plan is important. Why you should invest based on your goals, not on unreliable predictions. It's challenging to achieve your financial goals if your fear of losses prevents you from participating in market gains. Missing out on these gains can make it even more difficult, and perhaps riskier if you try to recover them later by engaging in market timing or aggressive stock picking strategies.

You need to stay invested all the time to capture the potential gains in the market. This is why it is important to maintain discipline and to tune out the noise so you can focus on achieving your goals.

Sources:

Business Insider: "Here's a complete rundown of Wall Street's 2024 stock market predictions".

Barrons: "Stocks Beat the Odds This Year. Why They Can Do It Again in 2024."

Reuters: "Market bets for 2024 thrown into chaos by US recession conundrum"

Marketwatch: "What 2024 S&P 500 forecasts really say about the stock market."