From the Department of Silly Analysis

E.S. Browning’s “Abreast of the Market” column today features a very bullish forecast made by Professor Richard Sylla of NYU.

Using 10-year averages of annual market returns, including dividends and adjusted for inflation, Prof. Sylla and his colleagues found that U.S. stocks have risen and fallen in surprisingly consistent waves for more than 200 years. The pattern has become even steadier since World War II.

I think this sort of analysis is highly superficial yet (and?) it seems to be very popular. First, looking at very long-term market performance is interesting from a historical perspective but much of this data is far from rigorous. The stock market was a minor speck of the American economy in 1790. Equity markets in a modern sense didn’t develop until the 1920s. Plus, the markets were not very efficient through the 1960s. I like to look at long-term data as well, but it’s a mistake to draw precise conclusions from it.

If the market sticks to its long-term pattern, Prof. Sylla says, the Dow Jones Industrial Average could climb to 20250 by the end of 2020, up 84% from today. The Standard & Poor’s 500-stock index might hit 2300, up 99% from Friday’s close of 1154.23.

It’s one thing to say that stocks are below their long-term average. I’m fine with that and it’s something you can easily show. But as with many in the art of pseudo-forecast, Professor Sylla is hedging his call beyond reason.

Now a recovery with 6.5% average annual returns, equal to the historical inflation-adjusted average, would fit, he says. He isn’t saying stocks will rise that much each year, just that this could be the average.

Prof. Sylla does see a 25% chance that the next decade could fall well short of that.

Sorry–this is where you lose me. A 25% chance isn’t exactly small. Making any forecast and giving yourself a one-in-four chance of being WAY off the mark makes the other 75% totally worthless.

Posted by on September 12th, 2011 at 12:59 pm


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