Monthly Merricks – IS THE CONSENSUS ALWAYS WRONG?

To say that the consensus is always wrong is almost certainly untrue, but being among the consensus hasn’t exactly covered you in glory in recent times. Take the previous couple of years’ forecasts of predicted annual returns. At the beginning of 2022, the median forecast for the S&P 500® Index was 5,000 by December 31, 2022.

What happened? The S&P 500® Index closed the year at 3,839.

Undeterred, they tried again for 2023. At the beginning of 2023, the median forecast was 4,000 by December 31, 2023.

What happened? The S&P 500® Index closed at 4,770.

Forecasts for both years were massively out. So what about for 2024? Here’s a summary:

Maybe spotting a contrarian opportunity, BCA Research stuck with its 2023 forecast of a recession hitting the US later this year (the consensus is now for a soft landing and thus the avoidance of a recession) and suggest that “equities are likely to decline significantly in response to a recession. In the US, the S&P 500 will fall to between 3,300-3,700”. BCA Research 4^th December 2023

As I write this, the S&P 500 sits at just over 4700, so these forecasts mean very different outcomes for the rest of this year. Someone is going to be more right than the other. Sadly, not many people will either notice or care by the time that we get to this time next year as the commentaries will already have been written about why there has been an over or underestimation of what has shaped the previous 12 months’ returns and the expectation will be that the next 12 months will go entirely to plan.

Why Bother With Forecasts?

This is a good question. There is not a lot that anyone can do about global events anyway so the best that can be hoped for is that your portfolio doesn’t implode if the world itself does.

Over the years that I’ve been involved in the investment industry it has been noticeable how the emphasis has changed completely from how a portfolio actually performs (there was a time that there was genuine pride in outperforming) to how cheap your product can become. This has lead to everyone being invested in the same handful of funds as huge passive funds can offer themselves far more cheaply than smaller, actively managed funds. With the emphasis on cost, any outperformance by a fund manager is readily put down to luck. It’s a shame, because it has meant that a number of good people in this industry have walked away, either voluntarily or involuntarily.

A Couple Of Observations:

Without attempting any forecasting, I share a couple of observations that have caught my eye which may help in shaping a portfolio regardless of whether this coming year will be a good one, or bad.

It may have been significant that in the strong market rally that occurred in the last couple of months last year, there was a slight widening of the stocks that benefitted. Much has been written about the dominance of the “Magnificent 7” in overall returns, but I thought it was quite interesting that, as opposed to the first ten months of 2023 when only 27% of stocks outperformed the S&P 500 Index, 56% of stocks outperformed in the last two months of the year. A broader participation in market returns can only be welcomed.

The second thing that caught my eye was this slide from a presentation made by First Trust to kick the calendar year off.

This is the strongest signal I’ve seen towards the importance of healthcare since my last prescription was issued! Seriously, the healthcare sector had a very disappointing year in performance terms last year which was a bit of a head scratcher coming so soon after a global pandemic, with the exception of a couple of stand out performers related to weight loss drugs. The increased spending in the chart by the over 65s is not just being made on healthcare, obviously, but it seems reasonable to expect a consistent level of spending to continue, not just by the boomers themselves but also by those who need to treat them as they grow older which, combined with a lower entry point as a consequence of a poor previous year, suggests that there can be worse allocations to be made than increasing one’s healthcare exposure within a portfolio.

AI may have been 2023’s poster child, but both the cybersecurity and healthcare innovation sectors can benefit from its continuing development from child to young adult.