Wall Street’s “top”10 strategists every December are asked by Barron’s, a respected weekly financial newspaper, to forecast the best and worst industry sectors for the coming year; they underperformed again in 2013.
According to data compiled by Fritz Meyer, an independent economist, five of the 10 top Wall Street firms’ strategists predicted in December 2012 that consumer discretionary companies — makers of luxury goods and nonessentials — would be among the worst-performing stock sectors for 2013. What happened? “It was a huge miss,” says economist Meyer, who served as the senior strategist of one of the world’s largest investment companies for 15 years before founding an independent analytics firm in 2008. Consumer discretionary — the industry that half of the strategists advised avoiding — gained 41%, as measured by the Standard & Poor’s 500 Sector Indexes. It was the No. 1 sector to invest in!
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According to Meyer’s annual assessment of Wall Street’s track record, the 2013 Sector forecasts of Wall Street’s top strategists included four good calls and five bad calls. Following the advice the big Wall Street firms in 2013 would have underperformed the unmanaged Standard & Poor’s 500 stock index, according to Meyer, but it would have also avoided Wall Street’s investment advice fees.
“Was 2013’s performance by the strategists an aberration?” Meyer asked. “By no means.” According to Meyer, the strategists have trailed the unmanaged S&P 500 every year since 2005.
Meyer’s says his Denver-based firm, Fritz Meyer Economic Research, has carefully tracked the Barron’s sector forecasts every year since 2005, when the venerable weekly began asking Wall Street firms for their sector calls in its annual “Outlook” cover story.
“When you net out the number of positive forecasts for a sector versus the number of strategists negative on that same sector, the consensus forecasts made by Wall Street’s strategists have performed poorly,” says Meyer, a one-time mutual fund manager. “For the nine-year period between the start of 2005 and the end of 2013, an investor would have profited far more in an unmanaged index fund than following Wall Street’s sector advice,” says Meyer.
Meyer says none of the forecasters have distinguished themselves over the nine-year period that Barron’s has published Wall Street’s sector predictions.
Meyer’s annual appraisal is rare authoritative assessments of Wall Street’s long-term track record. While financial publications and financial news TV shows annually feature so-called “experts” predicting which sectors will outperform in the year ahead, the media outlets almost never make any effort to assess the track records of the previous year’s “experts,” the talking heads of the moment who seem to actually believe they can consistently predict the future and think they know which industries will outperform every year.
Broad diversification of your core holdings in low-cost instruments is best because sectors calls are so difficult. If you want to learn more about investment strategy, please drill down on some of the articles here and connect socially.