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Develop Your Critical Thinking

Thanks to various technological advances in recent years we have been able to, among other things, improve our decision making, save time and be more efficient in our daily lives. For example, the automobile GPS system is an indispensable tool when traveling abroad. However, we tend to trust it blindly and follow its instructions to the letter. However, this technology is fallible as three Japanese tourists unfortunately learned the hard way. While visiting Australia, they had to abandon their rental car… in the Pacific Ocean! Even though it was obvious that the route proposed by the GPS led nowhere, they did not question it for a single moment.

We can certainly learn a lesson from this misadventure, which also applies to the stock market...

Even when all the experts agree, they may well be mistaken.
Bertrand Russell

At the end of each year, Wall Street's top strategists publish their earnings forecasts for the S&P 500, the leading benchmark in the United States. Like the Japanese tourists mentioned above, many active traders follow these predictions religiously, without questioning the usefulness of this kind of information. Given that these professionals have extensive stock market experience and privileged access to quality financial information and sophisticated financial forecasting models, it is naturally tempting to trust them. However, in my opinion, you should not rely solely on this type of forecast or you may risk your performance going adrift...

Firstly, according to Bespoke Investment Group, between 2000 and 2015, the Wall Street strategist consensus projected a positive performance for the S&P 500 for each of these years and an average annual return of 9.5%. In fact, during this period, the S&P 500 posted a negative performance for five years – in 2000, 2001, 2002, 2008 and 2015 – and an average annual return of just 3.9%. Moreover, in 2008, the yield spread between the average forecast of these specialists and the index was 49.6% (consensus: 11.1% vs S&P 500: –38.5 %).

Secondly, because they use substantially the same analytical framework, we see a sheep-like behavior of these experts in setting their target prices for the S&P 500. For example, for 2017, the average expected level is 2,356 points for the S&P 500, an increase of about 5%. Jonathan Golub, the chief strategist at RBC Capital Markets, is the most optimistic with a target price of 2,500, a difference of only 200 points from the most pessimistic forecast (2,300) shared by five strategists.

In light of the above, it is preferable for active traders to develop an analytical method of their own. They would therefore be less inclined to pay attention to these types of predictions which, after all, have proven futile. To do so, I invite you to register for one of the many training programs offered by Desjardins Online Brokerage. Whether these sessions involve technical analysis, options or risk management, you will be able to acquire the knowledge, skills and abilities needed to develop your own strategies, manage your investments appropriately and above all, develop your critical thinking with regard to recommendations from financial professionals like Wall Street strategists.

Sources:

  • Akiko Fujita. GPS Tracking Disaster: Japanese Tourists Drive Straight into the Pacific, ABC News, March 16, 2012.
  • Jeff Sommer. Wall Street’s Annual Stock Forecasts: Bullish, and Often Wrong, The New York Times, December 16, 2016.
  • Lu Wang. Contrarians Banished as Wall Street Strategists Unite on S&P 500, Bloomberg, December 21, 2016.

The author

Michel Villa

Michel Villa

Speaker, stock market blogger and trading coach