After the stock market's strong end to 2009, and its initial gains earlier this year, fear and uncertainty is gripping investors once again. As usual, many are turning to financial experts for insight on when the carnage might end. But as Tom shows, these forecasts often turn out to be dead wrong.
After the stock market's strong end to 2009 and its initial gains earlier this year, fear and uncertainty is gripping individual investors once again. I thought it would be instructive to reflect on some of the behavior we saw during those dark months in late 2008 through March 9, 2009.
What struck me most was how so many investors desperately turned to the media and well-known financial experts to get their take on when the carnage might end and where to invest their money until the markets “bounced back.” It’s understandable, as it’s tough to watch your hard-earned money decline so precipitously in value. But what individual investors failed to realize is that, time after time, no expert, no company, no government entity has been able to accurately and consistently make short-term financial predictions.
It is a well-known platitude: "Forecasts are always difficult, particularly when they have to do with the future." I have compiled a brief listing of 2008/2009 predictions (and one from much earlier) that ended up being way off the mark. I do this not to attack the well-respected individuals and institutions who erred, but to illustrate how predicting short-term market trends or other financial issues is an impossible task.
"I don't expect any serious problems among the larger banks." -- Federal Reserve Chairman Ben Bernanke, February 28, 2008
In September, Washington Mutual failed, and giants like Citigroup and Bank of America had to fall back on government help.
“AIG could have huge gains in the second quarter.” -- Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008
AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.
“I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under and I think they are in good shape going forward.” -- Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008
Two months later, the federal government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.
“I think you’ll see (oil prices at) $150 a barrel by the end of the year” -- T. Boone Pickens, June 20, 2008
Oil was then around $135 a barrel. By late December, it was below $40.
“(By 1980), the US will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.” -- President Richard Nixon, January 1974
Of the 19.5 million barrels per day of petroleum products that Americans consumed in 2009, 11.1 million or 57% were imported, according to the Department of Energy.
Finally, in December 2007, Business Week asked some of the most respected, well-known finance professionals where the Standard & Poor’s 500-stock index would be at the end of 2008. Here’s a sampling of the predictions:
The S&P 500 finished 2008 at 903.25, down 38.5% (price only).
Bottom line: No one has tomorrow’s newspaper. Right now, you could find dozens of different market predictions all across the Internet and in the news media. Read them. Debate them. Just don’t change your long-term wealth-management strategy because of them. The only prediction I’ll make is that many will likely be wrong again. You can say you read it here first.