Another new year has begun, which means Wall Street’s “Where to Invest” prediction pieces now dominate the financial pages. As usual, headlines read something like “Here’s What the Experts Predict” and “The Ten Best Stocks for 2024.”
It seems like a good time, therefore, to review an important golden rule: Don’t believe everything you read.
Remember, there’s often more hype than substance behind the headlines. The financial press publishes hot stock tips and portfolio strategies curated by “Top Investing Pros” to attract eyeballs, satisfy advertisers, and spur sales—not to act as your personal fiduciary.
Since these forecasts are unlikely to come with the necessary warning labels— “Side effects may include underperformance” seems appropriate—we think the best way to caution investors is to simply review a few of last year’s prominent predictions:
Misfortune From Fortune
Fortune Magazine cautioned readers that in a bear market, what you buy is just as important as when you buy. Such prescience was offered to readers courtesy of the strategy and research team at Bank of America, which helped Fortune assemble its list of the “11 Best Stocks to Buy for 2023.”
While Fortune’s stock picks were curated to “limit the chance you’ll feel buyer’s remorse,” ultimately, they did just that. In a year in which the S&P 500 Index delivered a total return of 26%, more than half of Fortune’s stocks lost money.[i] Notably, Fox Corp. fell 8%, Exxon dropped 12%, and Mosaic Company plummeted 24%. The average return for Fortune’s “11 Best” was just one-half of one percent, a full twenty-five percentage points below the return of the market.
Goldman Sachs: “Less Pain, No Gain”
Those were the words written by Goldman’s U.S. equity strategist, David Kostin, describing the venerable banking giant’s market outlook for 2023. While Goldman believed the risk of recession was mild, their forecast called for “zero appreciation in the stock market.”[ii] Against that gloomy backdrop, Goldman advised investors to favor stocks in defensive sectors, such as healthcare (+1.7%), energy (+0%) consumer staples (-1.3%).
Not only did 2023 turn out to be one of the best stock market years in recent memory, Goldman’s three favored sectors were among the worst performers—only the utilities sector dropped more.
Globally, Goldman predicted that as China finally emerged from its strict Covid controls, its reopening would be “a major driver” of “higher equity prices.”[iii]
With a 2023 return of -11.3%, China was the 2nd worst-performing of 45 developed and emerging economy stock markets. Ouch.
Misguided Enthusiasm from Jim Cramer
A review of stock predictions wouldn’t be complete without mentioning Jim Cramer. Cramer, the star of popular TV show Mad Money, is well known for his prolific and bombastic stock forecasts.
Despite widespread investor pessimism, Cramer was decidedly optimistic to start 2023, believing “so many segments of the market” could be winners.[iv] His enthusiasm centered on 22 different stocks he believed would outperform.
Cramer’s cheery outlook was tempered only by his warning to “stay away” from tech stocks, which he cautioned would likely be “hurt the worst.”
As we know now, avoiding tech stocks would have cost investors dearly in 2023, as technology (+60%) was the best performing U.S. sector. That enormous miss aside, a handful of Cramer’s stock picks shone brightly, with Meta (+194%), Advanced Micro Devices (+127%), and Netflix (+67%) all delivering outstanding returns.
The excess gains of his winners, however, were largely offset by the widespread underperformance of Cramer’s other picks, particularly Enphase Energy (-50%), VF Corp (-31%), and Northrup Grumman (-14%).
All told, a portfolio of Cramer’s 22 stock picks rose 20%, a great year in absolute terms. But relative to the benchmark Total U.S. Stock Market Index—which gained 26% in 2023 and required no stock-picking at all—the performance of Cramer’s picks seems downright lackluster.
Morgan Stanley: Fooled and Confused
Few Wall Street strategists have enjoyed the fame recently foisted upon Morgan Stanley’s Mike Wilson. Before 2022, Wilson conspicuously went against the Wall Street consensus and predicted—correctly, as it turned out—an annual decline in the S&P 500 Index. For that prescient call, Institutional Investor named him a “Number 1 top stock strategist.” [v]
It was noteworthy, therefore, when, Wilson predicted stocks were set to tumble even further in 2023. His forecast called for a 24% drop in the S&P 500 and market declines “much worse than what most investors are expecting.”[vi] As a result, Morgan Stanley advice to clients was for bonds to outshine stocks.
In May, with the S&P 500 up 10% for the year and their prior prediction faltering, Wilson doubled down, warning investors not to be duped. “Bear markets,” he said, are “designed to fool you, confuse you, make you do things you don’t want to do.”
Whether Wilson himself was fooled or confused, we may never know. But with the S&P 500 Index ending 2023 up 26% on a total return basis—and the U.S. bond market delivering solid, albeit far lower, returns of 5.5%—Wilson was most unquestionably wrong.
Ignore the Tabloids
What’s the takeaway for investors?
Routinely looking to Wall Street for advice on how to invest in the coming year is like looking for reliable news in the tabloids: let’s just say it’s heavy on “shock” and light on “value.”
The best way to protect your portfolio from the annual market forecast charade is, quite simply, to not play the “active” stock picking and market timing game. Instead, use evidence to diversify your portfolio, drive down costs and taxes, and rebalance when disappointing returns throw your target mix out of whack—buy, hold, and rebalance.
That simple advice doesn’t often make the headlines, but history has proven it to be the better way to invest. And, it doesn’t need a warning label.
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[i] https://fortune.com/2023/01/12/11-stocks-2023/
[ii] https://www.goldmansachs.com/intelligence/pages/us-stocks-are-forecast-to-have-less-pain-but-no-gain-in-2023.html
[iii] https://www.goldmansachs.com/intelligence/pages/china-2023-outlook-after-winter-comes-spring.html
[iv] https://www.cnbc.com/2022/12/20/jim-cramer-says-these-7-stocks-will-be-winners-in-2023.html
[v] https://www.institutionalinvestor.com/article/2bstoaspi8lrcakelcqv4/research/meet-the-new-stars-of-the-all-america-research-team
[vi] https://www.cbsnews.com/news/morgan-stanley-stock-outlook-20-percent-drop/