Barron's big money hedge

November 27, 2016 03:00 PM
In the February 2016 Issue with Forecasting, Modern Trader explored the numbers behind Barron’s annual roundtable.

In the February 2016 Issue with Forecasting, Modern Trader explored the numbers behind Barron’s annual roundtable. The publication’s annual survey offers predictions for the year ahead. However, Modern Trader dug deeper into the figures and found just how conservative – yet overly optimistic – traditional sell-side analysts have become to bolster business. 

Barron’s is back at it again. In early October, Barron’s returned with another flawed analysis of stock recommendations, saying in its headline that “Bulls Rule” and, in its sub-headline that stocks “could” gain 9% over the next 12 months. The survey explored ongoing market sentiment of analysts, with data that seemed to conflict the 9% prediction. 

The projection statement is confounding given two important issues. First, Barron’s admitted that just 45% of analysts were “Bullish” or “Very Bullish” through mid-2017. But more interesting, 90% of analysts surveyed predict a 10% correction over the next year. The data further conflicts with a “9%” gain when it is revealed that just 12% of analysts are bullish on U.S. equities, while 57% were neutral, and another 31% were bearish (see “Blinded by numbers,” below).

When asked if equities will lag, equal or surpass their 25-year average of 9% over the next five years, just 10% said equal, while 10% said surpass. That means that 80% of analysts expect equities to fall short of their five-year average, making the 9% claim little more than a hedge.

When Barron’s says that stocks “could” go in one direction, they don’t analyze the actual probability of a 9% gain in 2017. 

Our friends at Eidosearch provided a probability breakdown for market performance over the next 12 months (see “One year out”). The chart indicates 10 probability buckets for possible returns. 

Yes, there is roughly a 50% chance that stocks could rise by 9% or more next year. But a more detailed breakdown offers greater understanding of expected future returns. According to analysis of historical data, the probability that stocks increase by a range of 8.95% to 12.28% is a single bucket of 10%. There is a 10% probability that stocks increase more than 26.2%, and a 10% chance that stocks fall by 10.35% or more.

Naturally, the 9% return prediction is a safe, conservative estimate for the publication. But it offers little to investors, particularly given the bearish sentiment of the analysts, who are either throwing darts into the air or providing cover for their investment firms.

About the Author

Garrett Baldwin is the Managing Editor of the Alpha Pages and the Features Editor of Modern Trader. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University, an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University.