On the heels of last year’s double-digit stock market losses and the worst year for bonds since 1792 (you read that correctly, seventeen ninety-two) one can’t blame investors if they’re worried about the year ahead.
Are we headed for a recession? Will the bond rout continue as the Fed raises rates to curb inflation? Which stocks will help our portfolio recover fastest?
For answers, many investors look to Wall Street’s annual “Where to Invest” guides, which typically promote “The Best Stocks for the Year Ahead” and other “Top Picks from Top Pros.”
To today’s wounded investor, these tips sound compelling. But today’s “compelling” forecasts often amount to no more than a source of next year’s laughs (or pain, for those following the “advice”).
Don’t believe me? Here are a few of last year’s most prominent market predictions.
Fool’s Gold from Goldman Sachs
Venerable investment banking giant Goldman Sachs saw the bull market for stocks continuing in 2022, predicting the S&P 500 index would rise by 7%.[i]
But not all stocks are created equal, so Goldman predicted a particular type—highly profitable growth stocks—would perform best. The firm lasered in further, recommending five individual stocks that should outperform.
To say nothing of getting the market’s direction incorrect—the S&P 500 fell 18% —Goldman missed badly on growth stocks (-33%), which performed far worse than the overall market.
And the performance of Goldman’s five individual stock selections? Financial services giant Mastercard performed the best (-3%), while crypto-miner Marathon Digital (-90%) performed the worst. Not one of the five stocks earned a positive return, and a portfolio of all five assembled in early January would have lost over half its value (-56%) by the end of December.
Kiplinger: Cheap, Well-Known, and Loved
Kiplinger took a different approach, suggesting investors should favor lower-priced value stocks.[ii] Trading at price-to-earnings ratios far below the broader market, Kiplinger wrote, value stocks could offer stability to those concerned about the market’s future direction.
Kiplinger recommended 15 value stocks for readers to consider, noting that each stock was followed by at least 10 Wall Street analysts and was overwhelmingly rated “Buy” or “Strong Buy.” In other words, these stocks were well-known and loved, yet still cheap. Sounds like a group of sure winners, right?
By year’s end, just two of Kiplinger’s 15 stocks had posted a positive return, with winners United Therapeutics (+29%) and Encompass Health (+17%) far overshadowed by losers FedEx (-32%), General Motors (-42%), and MKS Instruments (-51%). All told, a portfolio of Kiplinger’s 15 value stocks fell by an average of -17%.
While -17% may not sound too shabby in light of the S&P 500’s -18% return, that’s not quite a fair comparison. Remember, Kiplinger recommended value stocks, which significantly outperformed growth stocks in 2022.
Accordingly, a more relevant performance comparison is to judge Kiplinger’s selections against a broad index of value stocks.
And last year, the 2,000+ stocks comprising the Russell 3000 Value Index fell just -8% on average, less than half the decline of Kiplinger’s highly curated list of 15—no stock picking required.
Forbes: 10 Picks from Top-Performing Managers
Forbes predicted stock markets could see a more challenging year relative to 2021, due to inflation, supply chain imbalances, and ongoing Covid concerns.
To successfully navigate those challenges, Forbes asked five top fund managers—who collectively oversaw $25 billion in assets and had beaten the market over the past 3, 5, or 10 years—for their best ideas on stocks for 2022.[iii]
How did the “great stocks” recommended by this heady group of all-star managers perform? The word “poorly” comes to mind, but that would be putting it too mildly.
Just one of the ten stocks recommended earned a positive return, with Canadian oil and gas company Paramount Resources gaining 9%. The second-best performer, Madison Square Garden Entertainment, fell -36%. And it was all downhill from there.
Six of Forbes’ ten picks lost more than 50%, with fintech company Affirm (-90%) plummeting the most. Collectively, Forbes’ 10 picks dropped -54% in 2022, roughly three times worse than the performance of the U.S. stock market.
What About Bonds?
A review of last year’s predictions wouldn’t be complete without a look at fixed income, especially after such a terrible year for the bond market.
The trouble with tracking bond experts’ predictions, of course, is the sheer size of the bond market. With over $40 trillion in value (double the size of the U.S. stock market) and more than 500,000 individual corporate issues alone, Wall Street experts aren’t asked to opine on which individual bond will outperform in the year ahead.
Predictions for the bond market tend to focus on the overall direction of interest rates, which sectors of the bond market to favor (i.e., corporate bonds, high quality, or short-term bonds), or the magnitude of any predicted rate changes.
Last year, most strategists correctly “predicted” that interest rates would go up, taking well-publicized cues from the Federal Reserve. It was the magnitude of those rate increases, however, which caught Wall Street’s experts flat-footed.
- J.P. Morgan predicted the 10-year bond would yield 2.25% by year’s end.[iv]
- The head of global bonds at PGIM, one of the largest bond managers in the world, predicted the 10-year yield would peak at 2% before falling in early 2023 to 1.5%.[v]
- Wells Fargo’s director of interest rate strategy predicted the 10-year wouldn’t rise above 2.25%.[vi]
- BMO’s head of rates strategy saw 2% as the high end of where the 10-year could end 2022.[vii]
As 2022 came to a close, the 10-year yield stood at 3.9%, much higher than Wall Street strategists predicted.
How far off were these forecasts? At the risk of oversimplifying, this would be like the weather forecaster calling for 70-degree weather when it turns out to be 119 degrees.
While it’s a little too early to tell how funds influenced by these strategists’ predictions performed, results for the first half of the year don’t look so good.
According to SPIVA’s mid-year 2022 active vs. index scorecard, about 70% of government bond funds, 69% of emerging market bond funds, 86% of municipal bond funds, and 71% of intermediate-term investment grade funds underperformed their relevant benchmarks over the first half of 2022.[viii]
We’ll just have to wait to see if these bond-pickers improved in the second half of the year. I wouldn’t hold your breath.
Don’t Gamble, Diversify
What’s the takeaway for investors?
Routinely looking to Wall Street for advice on how to invest in the coming year is like rolling the dice in Vegas: let’s just say they don’t hang millions of dollars of art on casino walls because gamblers collectively win.
Just like the house in Vegas, Wall Street and the financial media rely on investors’ short-term memories. Last year’s forecasts flare out? Wait a year, another group of winning managers will emerge—easy to find with the benefit of hindsight—and those star managers’ predictions will be promoted.
The best way to protect your portfolio from this annual charade is, quite simply, to not play the active investment game. Instead, use evidence to diversify your portfolio, drive down costs and taxes, and rebalance when disappointing returns throw the mix out of whack.
True, that advice doesn’t sound near as sexy as what you’ll read in the annual “Where to Invest” guides. But it’s also unlikely to prove as costly.
[i] Pan, Jing. Goldman Sachs just got bullish on these 5 growth stocks for 2022. MoneyWise, January 4, 2022. https://financialpost.com/moneywise/goldman-sachs-just-got-bullish-on-these-5-growth-stocks-for-2022
[ii] Reeves, Jeff. The 15 Best Value Stocks to Buy for 2022. Kiplinger, December 21, 2021. https://web.archive.org/web/20220121015153/https://www.kiplinger.com/investing/stocks/value-stocks/603975/best-value-stocks-to-buy-for-2022
[iii] Klebnikov, Sergei. 10 Great Stock Picks for 2022 From Top-Performing Fund Managers. Forbes, December 20, 2021. https://www.forbes.com/sites/sergeiklebnikov/2021/12/20/10-great-stock-picks-for-2022-from-top-performing-fund-managers/?sh=2e72714e2222
[iv] J.P. Morgan Global Research. 2022 Market Outlook: More Upside for Stocks, Economic Growth to Rebound. https://www.jpmorgan.com/insights/research/market-outlook-2022
[v] Domm, Patti. After rapid rate increase to start 2022, investors see benchmark 10-year yield rising to 2% soon. CNBC, January 4, 2022. https://www.cnbc.com/2022/01/04/after-rapid-rate-increase-to-start-2022-investors-see-benchmark-10-year-yield-rising-to-2percent-soon.html
[viii] Edwards, Tim, PhD, et al. SPIVA® U.S. Scorecard. S&P Dow Jones Indices. Mid-Year 2022. www.spglobal.com/spdji/en/documents/spiva/spiva-us-mid-year-2022.pdf