How to Make Sense of Stock Market Predictions

Tyler Dolan

By Tyler Dolan
Tyler is a CERTIFIED FINANCIAL PLANNER™ practitioner who believes financial education can empower people to reach their goals.
Posted on 03/05/2018

The financial media is full of stock market predictions. They're everywhere—and they're often contradictory. If you Google "stock market predictions” you'll see a slew of articles from various sources including Fortune, Marketwatch, Forbes, and CNBC, and they all say something different. For 2018, for example, some call for a 4 percent to 6 percent percent gain; others are predicting a 9 percent return. I even saw one prediction that anticipates a 10 percent to 15 percent correction (decline) in 2018.

Don't panic! Take a breath. I didn't include that one to scare you. I just wanted to highlight how drastically different predictions out there can be. At a fundamental level, this is how the market works. One investor may want to sell a share of stock because they think it's overpriced. An investor on the other side of the transaction may buy that share of stock because they think it's a good deal. Each investor perceives the future performance differently; as such, they subscribe to a different prediction.

Confusing, right?

I get it, and I can guess what you might be thinking: So, which prediction should I put my stock in? (Pun fully intended.)

None of 'em. Don't read too far into them. Take 'em with a grain of salt (and while we're at it, add a lime wedge, too). Of course there's a lot of thought and research that goes into these predictions, and sometimes they're right. But they're often wrong. There are too many variables at play to always be accurate (such as ever-changing economic conditions, geopolitical and/or military conflicts, changes in monetary and/or foreign policy, etc.). If they're right all the time, I think they'd be rich enough that they wouldn't have to publish their annual predictions.

So since nobody can predict what's going to happen, does that mean you shouldn't invest at all?

Well, it depends.

Your investments should be in line with your financial goals, your time horizon for those goals, and (most importantly) your risk tolerance. If you've decided to invest for one of your goals, you should understand and be comfortable with the risk you're taking with these investments. You should understand that financial markets are volatile. There are years when the market is up, some when it's down, and some years it's pretty flat.

For example, check out the calendar year performance of the S&P 500 since 1988 (provided by YCharts; figures include dividends).

Year Performance Year Performance Year Performance
2017 21.83% 2007 5.49% 1997 33.36%
2016 11.96% 2006 15.79% 1996 22.96%
2015 1.38% 2005 4.91% 1995 37.58%
2014 13.69% 2004 10.88% 1994 1.32%
2013 32.39% 2003 28.68% 1993 10.08%
2012 16.00% 2002 -22.10% 1992 7.62%
2011 2.11% 2001 -11.89% 1991 30.47%
2010 15.06% 2000 -9.10% 1990 -3.10%
2009 26.46% 1999 21.04% 1989 31.69%
2008 -37.00% 1998 28.58% 1988 16.61%

Now check out a chart of the S&P 500 over the past 30 years (from Google Finance):

S&P 500 Chart 1987 - 2018

If you're a visual learner like me, these illustrations will paint a pretty clear picture: The stock market is volatile. Your investment account balance will probably go up and down in the short term. But! Look at the peaks and valleys on the long-term chart. Historically, that's what the stock market does. Past performance isn't an indicator of future performance, but the stock market tends to recover from its downturns over time. I'll let you (along with your personal financial planner) decide what the long-term trajectory of the chart looks like. Approach your investments knowing there will probably be market downturns along the way. They might really stress you out. Trust me, I understand; I've been through a couple.

Overall, the moral of the story is stay the course. The late Sir John Templeton said it perfectly: "The four most dangerous words in investing are ‘this time it's different.'”

Tune out the noise that the media creates about the stock market. Don't make knee-jerk reactions to their predictions, and don't panic during market downturns. Hang in there.