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Dow Jones NewsApr 25, 11:35 AM UTC
MW Yes, this stock market is hard to predict - but it always is. Here's what's even harder.
By Mark Hulbert
It's difficult to overcome 'hindsight bias' - thinking that investing was easier than it really was
Stock market predictions are difficult - especially about the future.
Short-term stock-market timing is incredibly difficult these days - just like always. But Wall Street will tell you this time is different.
Typical is a morning note from Bloomberg earlier this week about "a new reality" on Wall Street: "All the price moves now - the sudden surges and the stomach-churning tumbles - are being driven by White House policies that seem to predict where stocks ... will go next."
Stock-market predictions are difficult. The authors of this note are undeniably correct that it's "nearly impossible" to time the stock market's short-term gyrations. But when has it been significantly easier? Based on my more than 40 years of rigorously calculating the performance of short-term stock-market timers, I confidently conclude that successful short-term market timing has always been extremely hard to pull off.
It's a trick of our minds that the past always seems to have been more predictable than it really was. Psychologists call this trick "hindsight bias," and Wikipedia describes it as "the common tendency for people to perceive past events as having been more predictable than they were."
Trends in predictability
To objectively measure changes in the stock market's predictability, I calculated the dispersion of short-term timers' predictions. To the extent the stock market is perceived to be more predictable, there would be less dispersion among the short-term timers - in other words, greater agreement. In contrast, when the market's short-term direction is particularly inscrutable, the timers' opinions would be all over the map.
The accompanying chart plots this measurement over the past decade. It shows the standard deviation of the recommended equity exposure levels from almost 100 short-term stock-market timers that my performance auditing firm has monitored daily. A higher standard deviation means less agreement among the market timers, while a lower one means that their predictions fall within a relatively narrow range. Current market predictability is almost precisely equal to its long-term average.
We should be thankful that market-timer disagreement is not above average right now. One academic study found that above-average disagreement is bearish for stocks. Entitled "Index Funds and Stock Market Growth," the study (which appeared in the Journal of Business in 2003) was conducted by William Goetzmann, a finance professor at Yale University, and Massimo Massa, a finance professor at the Insead Business School.
The professors reached their conclusion after analyzing the Hulbert Financial Digest's database containing each market timer's recommended equity exposure level daily over the prior several decades. Upon measuring the dispersion of timers' outlooks and fund flows into and out of a major S&P 500 SPX index fund, they found that a higher dispersion of newsletter opinions is associated with reduced inflows and increased outflows - both of which are short-term bearish.
To illustrate, notice from the chart that over the past decade, the lowest level of market-timer dispersion (i.e., the greatest agreement) occurred in December 2019. The S&P 500 rose 5% over the next two months. In contrast, the greatest market-timer dispersion occurred in June 2022, in the middle of that year's bear market, which didn't end until October 2022.
Nevertheless, market-timer disagreement today is no higher or lower than the long-term average. That means that, despite our impressions to the contrary, the market is no more inscrutable now than the historical average.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: 'Bond king' Jeffrey Gundlach predicts our next financial hangover - and it's sobering
Also read: High mortgage, credit rates don't just hurt consumers. These stock-market sectors could suffer too.
-Mark Hulbert
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04-25-25 0735ET
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