The business media love predictions, but they often do more harm than good.
Richard Kovacevich, the former CEO of Well Fargo (WFC) , appeared on CNBC on Thursday morning. He was asked about the stock market and said that he expected a 20% drop at some point in the next 18 months.
It is understandable that CNBC does those sorts of interviews and is interesting to consider the prediction, but it is the type of forecasting that is worse than worthless.
The market always has, and always will, go through cycles. Predicting a 20% pullback in the next few years is equivalent to predicting that the sun will rise at some point in the next week. That is just the natural cycle of the market. If you are surprised that a bear market might follow a bull market, then you are in the wrong business.
What is even worse is the imprecision of the timing. This sort of prediction might be helpful if there was some context for it. From what level with this correction start? What is a likely catalyst? How long will this corrective action persist?
Unfortunately, Institutional Wall Street does quite a bit of marketing based on making these sorts of worthless predictions. The goal is to make enough "big" calls that you will eventually be right and then can attract new clients based on this superior market insight. It works often enough that it has become a staple of business journalism.
In my years of trading, I have steadily shifted my focus to tactics and strategies and away from predictions and forecasts. It is my experience that when a prediction proves correct, it is much more likely the result of luck rather than great skill.
The only value of predicting that the market will correct 20% in the next 18 months is that it's a good reminder of the cyclical nature of the stock market. I think we can safely conclude that the market is going to have some significant ups and downs if your holding period is long enough.
The current market is seeing some corrective action now after a good run. It is fairly mild, but it has been expanding. It is a good reminder that the ebb of the flow of the market occurs over the course of days as well as over the course of 18 months.