The annual prediction cycle is just about over, and so far the S&P 500 was a little under 4000.
The S&P 500 targets for 2023 from major investment banks are as follows: Deutsche Bank: 4,500, Oppenheimer: 4,400, BMO: 4,300, Jefferies: 4,200, JPMorgan: 4,200, Credit Suisse: 4,050, Bank of America: 4,000, Goldman Sachs: 4,000, Citigroup: 3,900, Morgan Stanley: 3,900, UBS: 3,900, and Barclays: 3,725.
A number of these strategists are looking for the market to drop sharply in the first half of the year before it recovers and hits their year-end target. Maybe that will happen, but none of these investment heavyweights did a very good job of predicting in 2022.
Over the course of many years, Wall Street has created a very lucrative industry that is based on listening to the advice of those professionals that are predicting the future. The fact that they are seldom correct doesn't seem to matter much. The prediction business drives trillions of investment dollars and will never go away.
These predictions are not totally useless. They help identify the many issues that are going to impact the market. Economic issues like inflation, recession, and the Fed will be primary market forces. Valuations, sector themes, and earnings will drive individual stocks, but it is foolish to think that we will predict all the twists and turns along the way.
Predictions are very good at identifying important issues, but they are very poor at determining how those issues will move the market.
How to Use Predictions
The best way to use these predictions is to consider them in the context of price action. Does that price action tend to confirm or deny what the experts think will happen? Ironically many market players think that because so many market pundits believe that the market will make new lows in the early part of 2023 that it won't happen.
There is a large contingent of market players that believe the consensus view is always wrong. They focus mainly on doing the exact opposite of the consensus view, but they end up making the same mistakes that those that rely on predictions make - they fail to give sufficient weight to price action.
The consensus view is correct much of the time. The crowd of investors is very astute but when price action becomes extreme, then the consensus view is likely to be wrong. That is an important issue to consider when you navigate the market. The herd of investors may seem uninformed and oblivious to reality, but they determine price action as their emotions will determine market trends more than anything else. At some point they always go too far, things reverse, but we won't know where and when until we start to see a shift in price action.
Remain Skeptical
It is interesting and helpful to consider market predictions, but it is important to remain skeptical of even those that sound the most logical and likely. Don't act on that thinking until there is price action to support those views, and then be ready to shift as conditions change.
The best opportunities for profits will arise when the price action starts to confirm a market thesis. That is when tradable themes develop. The key is to be aggressive when you feel you have an edge, but also be even more prepared to manage trades tightly.
If you try too hard to embrace a market thesis or prediction, it creates a bias and impairs your objectivity. Everyone wants to be correct - and once you are emotionally invested in a prediction, you will start to engage in data mining and will ignore evidence of things that call your prediction into question.
Be very skeptical of all predictions. They are colored by hopes and dreams. Price action is the cold, hard reality and will always prevail over the most astute market predictions. If the price action says a prediction is wrong, then it is wrong.
I will predict one thing about 2023 - there will be some significant rallies and pullbacks, and it will be a great year for disciplined traders that stay focused on price action rather than predictions.
