Investors beware.
Every year in December, Barron's publishes 2017 stock market forecasts from a group of Wall Street's most prominent analysts. Every year the mainstream financial media makes a big fuss over them.
This year's version came out Dec. 17, with a consensus 2017 stock market prediction for a gain of 5.2% in the Standard & Poor's 500 Index.
But anyone who trusts these stock market predictions enough to base investment decisions on them is almost always disappointed.
You see, despite the polished reputations of these Wall Street stars, their stock market forecasts tend to be off. And not by a little...
Why Wall Street's 2017 Stock Market Forecasts Are So Dangerous
Statistician Salil Mehta has studied these stock market forecasts for years. And he's found these supposedly "expert" predictions to be less accurate than random guessing.
Mehta, who once served as director of research and analytics for the U.S. Treasury's Troubled Asset Relief Program and for the federal Pension Benefit Guaranty Corporation, points out that over the past 17 years, the Wall Street experts have predicted a decline just 8% of the time individually. (The consensus forecast has an even worse track record: zero percent.)
But the markets have dropped in nearly one out of three years during that span. In each of those years, the consensus price of the experts was for a gain, not a loss. So their stock market forecasts were dangerously wrong in all of those years.
Don't Miss: Five "Total Wealth" Principles to Use Forever
"[Wall Street forecasters] are the vilest types of fortune tellers, since they completely miss the necessary downturns in the market, which can wipe out years of your hard-earned savings," Mehta wrote in his blog.
And while the Wall Street analysts weren't as far off in the years the markets rose, they still weren't all that close. The consensus prediction of Barron's roster of experts for any given year is for a 9% gain, twice the average actual return of 4.5%.
What's key here is that Wall Street's top experts almost invariably predict higher stock prices for the coming year. This is no accident. The investment banks for which these analysts work - big names like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), and Morgan Stanley (NYSE: MS) - have a vested interest in keeping retail investors buying.
The calculated bullishness is a big reason why these stock market predictions tend to be so far out of whack.
Case in point: When Mehta applied a statistical analysis, he found a disturbing pattern.
One Chart Shows How Flawed These Stock Market Predictions Are
"Simply looking at the actual correlation between the strategists' predicted level and the actual level, that relationship is negative!" Mehta said.
According to Mehta, the standard deviation of the experts' stock market predictions is 21%, which is actually higher than the raw market's standard deviation of 19%.
This is best understood by looking at a chart in which Mehta has plotted all the individual stock market forecasts of the past 20 years against the actual performance of the market...
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In other words, these stock market predictions are so far off the mark they're actually less accurate than the proverbial stopped clock that's right twice a day.
And by the way, Mehta isn't the only person to study the atrocious track records of Wall Street analysts. Economist Fritz Meyer has done similar studies of bad stock market predictions.
For investors, the lesson is look away when such prognostications from Wall Street's finest are put in the media spotlight. Assigning these forecasts any credibility whatsoever is bound to distort your investing strategy for the worse.
But that doesn't mean there isn't sound advice to be had on investing. You just need to know where to look...
Leave the Wall Street Crowd Behind for Something Far Better
At Money Morning, we're committed to pointing out Wall Street's misleading and self-serving prognostications while guiding investors to investing ideas that really do pay off.
Money Morning Chief Investment Strategist Keith Fitz-Gerald, a professional trader with more than 30 years of global experience, takes a dim view of the Wall Street crowd.
"There's an old joke on Wall Street that makes the rounds every now and again: God invented analysts to make weather forecasters look good," he said.
The problem, Fitz-Gerald said, is that conventional analysts "are often blind to new developments, changes in earnings, evolving consumer habits, and more. Worse, they're often bullish when they should be bearish and bearish then they should be bullish. Like lemmings, they'd rather go off the cliff together."
Instead of following Wall Street's lead, Fitz-Gerald advises investors to watch for stocks with strong fundamentals that tap into one of six "unstoppable trends" that he's identified.
These trends present huge investing opportunities with trillions of dollars behind them. Fitz-Gerald uses them as guiding principles in his free Total Wealth newsletter.
To start your journey toward becoming a smarter, better-informed investor - free of charge -- click here.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.