Articles

Are Stock Market Projections Accurate?

By : Teresa Conley | August 25, 2017

We are frequently asked by investors about our stock market projections. The truth is that no one knows whether the market will rise or fall this year, this month, or even today. 

Teresa Conley is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt County

At every tradable moment of the day, the stock market is fluctuating. It may start trending up and then head downward. Stare at it for too long and you may need to check yourself into a mental health facility. As a general rule, we have found that relying on stock market projections by paying attention to the micro-details of the market’s behavior is not the path to financial peace of mind.

However, what we do know about market performance (illustrated in the graph below) is that historically, over the last 85 years, bull market cycles lasted longer than bear market cycles.  Moreover, bull markets produced gains that more than offset losses experienced in bear markets. These two trends are important to understand if we are interested in creating a disciplined approach to investing and growing our wealth over time.

The empirical evidence shows that the stock market has steadily increased in value over the last 85 plus years. The rising trend lines in blue designate the bull markets occurring since 1926, and the falling trend lines in red documents the bear markets.

Stock Market Projections

Bull and Bear markets in the S&P 500: January 1, 1926 through December 31, 2012.

The blue and red market cycles are identified only in hindsight using historical cumulative daily returns. All observations are performed after the fact. In this chart, a bear market is identified in hindsight when the market experiences a negative daily return followed by a cumulative loss of at least 10 percent. The bear market ends at its low point, which is defined as the most negative cumulative return prior to achieving a positive cumulative return.

Investment firms may draw a number of conclusions from this data. 

  • First, since 1926, bull markets in the S&P 500 Index have lasted longer than bear markets and delivered price gains that are disproportionately greater than the bear market losses.
  • Second, fluctuating performance within each trend illustrates that volatility and uncertainty occur even within established market cycles.  Bull markets may have short-term, heart-stopping dips before making further gains.  Conversely, bear markets may seem like they are going to pull out before falling to new desperate lows.
  • Third, and most important, trend activity experienced in any historical cycle (up or down) is not apparent to market observersat the time, and are only clear in hindsight. This means that whether the market appeared to be experiencing gains or losses—good times or bad—no one actually knew how long the trend would last. While there were undoubtedly a number of individuals making predictions, the reality is that no one truly knew where the market would end up.

Investment Professionals and Predicting the Future

Of course, there is never a shortage of pundits who claim to know “when to hold them and when to fold them.” Unfortunately, we often see these financial advisors risking their clients’ money on hunches based on nothing more than media-fed hype.  These stock pickers and market timers are trying to beat the market. However, the evidence overwhelmingly shows that trying to beat the market fails in the long run. Investors who react emotionally to short-term movements in any bull or bear market are at risk of making poor decisions that compromise the long-term performance of their investment portfolio.

The bottom line is that while there is no sure-fire way to have accurate stock market predictions, the historical evidence shows that in the long run, markets tend to go up. With regards to investing, this suggests that the old adage “slow and steady wins the race” applies. Therefore, in the long run, since bull markets tend to prevail, we believe the key to growing your wealth is found in a steady, long-term approach that is not influenced by abrupt, and momentary, fluctuations in the market.

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