Why 2014 Dow Predictions Aren’t Worth Your Time

2013 was just another example of so-called market experts having a horrible record of guessing where the stock market will end up.

Jan 5, 2014 at 9:01AM

As the New Year begins, many well-known stock market personalities have posted their guesses on where the Dow Jones Industrials (DJINDICES:^DJI) will end 2014. As entertaining as these predictions might be, the terrible track record that Wall Street's finest have in actually making accurate estimates should convince you once and for all that relying on those predictions is a potential ticket to disaster.

The problem with predictions
In general, market predictions about the stock market fall into two general categories. Among major Wall Street firms, you'll typically find predictions that reflect general bullishness or bearishness without taking extreme positions one way or the other. For instance, coming into 2013, forecasts from six well-known investment banks called for returns on the S&P 500 of between 0% and 12%, according to figures compiled by PunditTracker. That put UBS (NYSE:UBS) squarely in the bearish camp even with its expectations of flat performance, while Bank of America's (NYSE:BAC) Merrill Lynch ended up looking like the bull of the group even though its forecast underestimated the S&P's actual gains by more than half.

In the other category, you can always expect to see some outlandish expectations. After five years of a bull market, most of these outlier predictions aim toward the downside. For instance, in 2013, financial author Harry Dent predicted that the Dow would fall to 5,000. The bad call was just the latest in a series of failed bearish predictions for Dent after the 2011 publications of his book The Great Crash Ahead: Strategies for a World Turned Upside Down. At the same time, though, some bullish calls from early 2013 look like they have a chance of coming true now, with JPMorgan (NYSE:JPM) analyst Thomas Lee having predicted that Dow 20,000 might be just four years away. With the Dow at levels closer to 13,000 at the beginning of 2013, that call sounded a lot more aggressive than it does now with the Dow near 16,500 -- even though it only implies annual average returns of about 11%.

Understanding business motivations
Obviously, when you look at any prediction, you should consider the motivations of the company or person making that prediction. For UBS, Merrill Lynch, JPMorgan, and other Wall Street analysts, those making predictions are trying to put their clients at ease about the investment decisions their respective companies recommend while also setting themselves apart as being better at making accurate calls about the market. Shareholders in those companies should want them to be smart about their predictions, avoiding going out on a limb that can bring scorn from the investing community and have a negative impact on their business. Yet few clients hold those banks accountable to their specific predictions, especially when their mistakes actually lead clients to make more money than they would have otherwise. Similarly, it makes sense for those who've written books about their market positions make predictions supporting their conclusions, as it whets readers' appetites to encourage them to pick up a copy of their books.

Before you look at any prediction, it's important to look back at the track record of whoever made the prediction. Yet even that can be misleading, as just because someone has been right before doesn't mean they'll be right again, and bad calls in the past might well turn into good ones for the future. In the end, your best move with predictions is to look at them as entertainment, to draw your own conclusions from their reasoning, and to try to come up with your own analysis of where the Dow and the broader stock market is likely to move in the years to come.

Be smart about the market
Scared of bearish predictions, millions of Americans have stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Fool contributor Dan Caplinger owns warrants on JPMorgan Chase and Bank of America. The Motley Fool recommends Bank of America and owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers