Proving Wall Street Strategists Are "Full Of Bull" | Zero Hedge

Proving Wall Street Strategists Are "Full Of Bull" | Zero Hedge: "In now what’s an annual rite for Wall Street, their market “strategists” come out to the major media outlets and celebrate what they deem to be a prophetic view of the market’s future.  Year after year though, what we see is a generally tight, and optimistic view of the next year’s market level.  Of course the market doesn’t always go up by 9% or so every year (in the past two decades it has been roughly half of this!), which begs the question where is the value in these strategists' forecasts?  Given that many on Wall Street have been dishing out their views to the media for nearly two decades (and includes multiple business cycles), we can now scrutinize more closely their forecasts and examine the quality of these firms individually (as opposed to only as a group for a single year).  What we see in this article is that in some random circumstances, a predicting firm may be just ok, but many of the times the firms’ prediction results over the past 18 years are generally slightly worse than if had you flipped a coin about your own fixed guess as to where markets are headed, over that entire time.

We laboriously put together 186 public forecasts, culled from 19 years of media coverage of their “annual market call” story.  And the data, the lengthiest ever for this purpose, is now available for your own public consumption here -https://sites.google.com/site/statisticalideas/home/wall-st-forecasters . 

What you’ll see below is that these optimistic predictions haven’t changed immediately after the dot-com bubble burst of 2000.  Though after the 2008 financial crisis strategist predictions have generally been brought down slightly, and run even more closely versus each other versus before the 2008 crisis.  Of course there isn’t much risk for the forecaster in making such lousy calls.  For example, of the 29 forecasting firms included in the study here, 13 provided forecasts in at least one of these disastrous market years: 2001, 2002, 2008.  And not one of these 13 firms ever envisioned a down market year in any of these 3 years.  If not bailed out through TARP, the other banks employing them did blow up however, and even then sometimes the analyst continued singing optimistic market praises at the new acquiring bank.  If Wall Street prophets were able to provide an explicit confidence interval about each of their forecasts, with the risk of being fired if the market falls outside of their own forecast interval, would this whole game come to an abrupt end?  Now let’s dig into these publicly tabulated strategist calls, from mostly the Barron’s reports.

It’s helpful to first simply draw out the raw data used for this analysis.  We do so in the diagram below, and use continuous returns for all of our calculations for greater analytical potential.  We see below that in December 2014, the 10 strategists surveyed predicted that the S&P would rise (and on average by 7%) through December 2015 (and there is standard deviation of 4% among these 10 strategists).  We show this with “X” data about 0.07.  The market of course, instead fell 1% during 2015, which we show with the blackened-in “O” data at -0.01.  So in this example, all of the market forecasts were more optimistically biased than actual reality. "



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