You need to read coverage very closely to clearly understand financial market forecasts. Photo by Lexilee/Moments - Getty Images.
It’s that time of year.
Professional prognosticators are coming out with their forecasts for 2016, and you should anticipate a sea of pixels will be spilled over them in the next few weeks. One such forecast, Credit Suisse’s, published Tuesday, was the first we have seen receive significant media play, and the coverage is a timely lesson in why investors shouldn’t necessarily take reporting at face value.
Credit Suisse happens to be the progenitor of the forecast in question, but you could probably swap in any firm’s name and write a similar deconstruction of inaccurate media portrayal—so it goes when media outlets who profit by whipping up a frenzy are tasked with taking something sort of dry, a market forecast, and jazzing it up. Our story here is about that jazzing, not the merits of the forecast in question.
In the report, the analysts stated it is their “most bearish strategic stance on the asset class in seven years.” Which was reported by some outlets as signifying “a bull turning bearish.” Others labeled it their most bearish outlook since the firm’s 2008 view.
But before you jump to any conclusions regarding Credit Suisse’s outlook, consider that the words may not actually mean what you think. You see, a bear market (a “bearish” outlook implies a bear market lies ahead, no?) is a protracted decline exceeding -20%. But Credit Suisse is forecasting the S&P 500 Price Index will finish next year at 2150. For those keeping score at home, that is 2.2% above present levels. So, what some reported as “a bull turning bearish” is actually no such thing at all. The terminology, realistically, should read: “It is their least bullish forecast,” which may seem semantic, but it has led to a bunch of incorrect reporting, so we figure it’s worthwhile to point out.
Their less-bullish outlook is underpinned by their expectation of how stocks would react to a Fed rate hike, Chinese weakness and what they presume are fairly valued stocks. We’ve spent oodles of time researching all three of these factors and we are skeptical they are very significant negative factors. But we are not here to criticize their forecast. Our firm’s will be out soon enough, and we’ll let 2016’s results decide which is correct. Our quibble here is with the reporting and terminology used, so let’s continue in that vein.
The statement that they were more bearish seven years ago implies a correctly negative (or at least tepid) outlook for US stocks in 2008. If so, that could represent a significant positive for Credit Suisse, considering we aren’t aware of any firm (including us) who correctly foresaw the financial crisis for the right reasons. But what was their outlook? Thankfully, the internet can answer that question.
On December 17, 2007, The Wall Street Journal published this photomontage of forecasters along with their 2008 outlook. None forecast a bear market, including the strategists over at Credit Suisse. They slapped a price target of 1650 on it, which marked an 11.2% gain above year-end 2007 levels. That would theoretically be more bullish than the present outlook, so reporting this as their least bullish/most bearish stance since 2008 is incomplete at best and doesn’t account for a key question: at what point in 2008? The timing matters, as these big Wall Street firm’s forecasts are sometimes pretty darn fluid. It isn’t unusual for firms to revise their outlook multiple times during the year as they react to the latest volatility and changing conditions. Details like this are crucial but often omitted from the narrative.
This adds another point about the reporting here. This “bearish” turn is a downward revision to Credit Suisse’s first-half 2016 target of 2200, announced just one month ago. Now, if that -2% revision seems minute to you—too small to warrant this much media attention—you are seeing this the same way we are. The difference between these two forecasts is pretty darn unlikely to make a difference to investors’ long-term results, yet it is being reported now as though they are calling for a cyclical top.
Ultimately, consider this for what it is: A reminder you shouldn’t take the reporting of a forecast at face value. How the words are crafted—what is said and unsaid, when they said it, and who said it—can dramatically impact your understanding of the message therein.