Why Investors Should NOT Listen to Market Forecasts

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A few months ago I wrote an article called, "Market Forecasting: Investors Beware." I talked about how economists and stock market gurus seem to be consistently wrong, and I provided numerous examples to make this point. In the January 14, 2008 edition of By the Numbers from Direxion Funds, they published a report showing how the forecasters did last year. The year 2007 appears to be a different year, but the same story. One thing the forecasters can claim is consistency because they are consistently WRONG!

* The average prediction made on January 1, 2007 by 58 Wall Street forecasters for the yield on the 10-year Treasury note as of year-end 2007 was 4.88%, an increase of +0.17% over its 4.17% level from December 31, 2006. Instead the actual December 31, 2007 yield did not rise from a year earlier, but fell to 4.02% (source: BusinessWeek).

* 82% of money managers believed in late December 2006 that long-term interest rates in the US would be "unchanged or higher 12 months later." The yield on the 30-year Treasury bond was not "flat to higher" but rather declined from 4.81% to 4.45% during calendar year 2007 (source: Merrill Lynch).

* 56 economists who were surveyed in mid-January 2007 predicted that the average price of oil would be $58 a barrel in the 4th quarter 2007, down $3 a barrel from its $61.05 price of 12/31/06. However the price of oil did not fall but rather rose +57% during 2007, closing last year at $95.98 a barrel (source: USA Today).

* The S&P 500 was up +9.2% YTD (total return) through Friday July 20, 2007, closing at 1534. The headline in Barron's over that weekend stated "It's Still Time to Buy" forecasting an additional +6% rise to 1625 by December 31, 2007. Instead the stock index fell 4.3% to finish 2007 at 1468. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: Barron's).

* As of Labor Day Monday last year (Sept. 3, 2007), there were just four months remaining in the calendar year. The S&P 500 had closed the previous week at 1474. Barron's asked eighty equity strategists to predict where the S&P 500 would finish the calendar year. Seven of the eight saw a rising stock market by year-end with one prognosticator foreseeing a December 31, 2007 value of 1700. The S&P 500 actually finished the year at 1468. (source: Barron's).

Also, from a long term historical perspective here is some more interesting "market forecast" trivia. This is also courtesy of Direxion's "By the Numbers" publication.

* On the morning of October 19, 1987, the trading day that ultimately resulted in the largest one-day percentage loss in the history of the S&P 500, the Wall Street Journal ran a front-page article with the subtitle "Some Stay Bullish, Believing Downturn is Temporary." The S&P 500 fell 20.5% that day (source: Wall Street Journal).

* On August 13, 1979, BusinessWeek ran a cover story titled "The Death of Equities." The S&P 500 closed at 107 on August 13, 1979. The S&P 500 closed calendar year 2007 at 1468 (source: BusinessWeek). Apparently equities didn't die...

* At the close of business on Wednesday October 9, 2002, the S&P 500 bottomed at 777 before beginning a bull market run that gained +101% to peak at 1565 on October 9, 2007, exactly five years to the day after the bear market bottom. The headline in the business section of USA Today on Thursday morning October 10, 2002 was "Where's the Bottom, No End in Sight" (source: USA Today).

The moral of the story is that forecasts make interesting conversation and trivia. Just don't use them to try to make money.

Understanding what makes the Stock Market Move Up and Down

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Successful investing requires more then just a little bit of know how and a dash of luck. It requires a cool head, an analytical mind, and the ability to make quick money decisions. This is especially true when investing in the stock market. Investing naturally comes with a level of risk. The market's activity fluctuates on a daily basis during the opening and closing bells.

Generally the stock market is supposed to grow in value over a period of time. This growth is actually an average of all of the stocks included on the market. While some may have increased in value throughout the day, other stocks will have fallen in value. In some cases growth can affect whole sectors. A sector is a bloc of companies involved in a specific type of business.

Movement in the market is affected by a number of different factors. News reports affecting a specific industry can cause investors to want to increase their holdings, or negative news can cause investors to exit as quickly as possible. These however, are not hard and fast rules. In some cases favorable news can result in lower stock prices as more investors try and sell their shares then are willing to buy, once the stock price falls, it can rise quickly again as even more investors are interested in "buying low".

According to analysts, the erratic movements of the stock market can sometimes be attributed to the large number of inexperienced and amateur investors. This can cause the irrational behavior sometimes seen. Mass panic has been blamed more then a few times for making the market move in directions that completely contradict normal rules of behavior for the stock market.

Amateur investors have a tendency to make decisions based on press releases or rumors that is sometimes not even related to the value of a stock itself. Other causes could be the activity of day traders. Day traders usually trade in such large volumes that they can affect a stock's price either negatively or positively.

Still other ways the stock market can be swayed is by a coutry's attempt at correcting inflation. Usually raising or lowering the interest rate does this. These rates are an indicator of the financial situation for a country. If rates are either raised or lowered, the market activity will usually be influenced.

Some companies are able to increase their individual stock prices by releasing quarterly reports showing they have met or exceeded their profit forecasts. Also releasing information about new products or technology that can increase that particular sector's value.

Conversely, if a company reports that they fell short of profit projections, the value of that companies stock will usually go down as investors sell off some or all of their stocks. Large shifts are usually due to overreaction to changes in risk.

Without the assistance of a professional, the market can be an unforgiving venture for the casual investor. This trend has begun to change due to better resources being available to investors on all levels. Research is a must for any investment.