“We’ve long felt that the only value of stock forecasters
is to make fortune tellers look good.
Even now, Charlie (Munger) and I continue to believe
short-term market forecasts are poison and should be kept locked up
in a safe place, away from children and also from grown-ups
who behave in the market like children.”

This quote is from Warren Buffett’s 1992 letter to Berkshire Hathaway shareholders — and one of my favorites.

But this has never stopped economic and market gurus from making their annual New Year’s forecasts.

Over my many years advising clients, I have very rarely seen negative market return forecasts, with many predicting somewhat near long-term averages.

Back in 2006, the Los Angeles Times noted that “forecasts for 2007 were following a time-honored strategy: restrain your expectations and be less likely to be disappointed.”

The New Year’s Eve column went on to say, “the typical outlook of money managers and market strategists is for a price gain of less than 10% on U.S. blue-chip stocks, more modest returns on smaller stocks, and a general hankering for higher-quality investments over risker ones.”

Consider some of the market return forecasts for the following year (2008), with the S&P 500 starting the year at $1,447.

“Shares should have a good year, returning 8% to 10%,” Wharton School professor Jeremy Siegel was quoted in Kiplinger.

Tom Lee, the then-chief U.S. equity strategist at J.P. Morgan, had predicted the S&P 500 ending at $1,590, representing a 10% return.

Other S&P 500 price predictions included Abby Cohen (then of Goldman Sachs) at $1,675, Tom McManus (Bank of America) at $1,625, and Richard Bernstein (then of Merrill Lynch) at $1,525.

The S&P 500 closed at $903.25 on Dec. 31, 2008. Oops.

To be sure, there are always contrarians. Michael Burry, who was chronicled in The Big Short by author Michael Lewis, was one of the few who predicted the 2008 financial crisis.

Burry convinced major investment banks to provide him with credit default swaps (CDS) against vulnerable subprime loans.

Few investors had the foresight to see the impending housing market collapse — or the courage to make such and stick with huge bets again Wall Street.

Burry’s skepticism and steadfast commitment led to a personal profit of $100 million and more than $700 million for investors who stuck with him.

Now to be fair, his subsequent calls haven’t been very accurate.

In September 2023, he said that “the mother of all crashes” was coming. In January 2023 he tweeted “sell.”

And Burry gave up on his bet against the semiconductor industry near year-end 2023, missing out on a 20% rally.

It appears that no matter how smart you are, sometimes you win and sometimes you lose when forecasting.

In my Dec. 13, 2024, column, I talked about elevated stock prices, noting former Federal Reserve chairman Alan Greenspan’s comments back in 1996 about “irrational exuberance.”

It turned out that his cautions turned out to be right — but quite early.

Note that while I long advised clients to build a well-diversified portfolio that was prudently aligned with their financial goals, time horizon and risk tolerance — and then stick with it — I have to tell you that current valuations make me a bit cautious and preparing for some market turbulence.

Consider the following: 

• U.S. Risk Premium. PIMCO’s December 2024 Perspectives noted a decline in the “risk premium” showing expected returns of stocks over risk-free U.S. Treasuries. This represents the excess return expected for taking on the risk of investing in stocks rather than the safety of U.S. bonds. The chart shows a fairly steady decline in excess return from 5% in 2010 to less than 2% today. For many of us, that’s not much of an extra payoff for taking the risk of investing in stocks.
  
• Despite the Federal Reserve’s 2024 cuts on short-term interest rates, yields on longer duration bonds have remained relatively high. As of Dec. 27, yields on the 10-year U.S. Treasury is about 4.6% — and higher rates are possible if inflation starts creeping back up. Yields on high-quality investment grade corporate bonds are even higher.

• Vanguard’s most recent 10-year return forecast projected returns for U.S. equities at 2.8%-4.8% with median volatility of 16.9% — with U.S. Treasury bonds at 4.3%-5.3% and medium volatility of 6.8%. Note that Vanguard is forecasting higher expected returns for both U.S. Value and U.S. Small Cap stocks at 4.2%-6.2% — and Global Developed Market Equities ex-U.S. at 7.3%-9.3% with medium volatility of 16.8%.

• There is a lot of uncertainty as we look ahead with regard to tariff wars, tax/spending policy, big federal deficits/debt and, of course, geopolitical risk.

The bottom line is that investors may look favorably at the prospect of earning 4%-6% on bonds with strong guarantees versus potential future returns on stocks that are arguably already kind of expensive.

If the Federal Reserve finds it necessary to begin raising rates again to combat inflation — and/or if “bond vigilantes” begin demanding higher returns in light of deficit spending and burgeoning debt — we may well see even higher yields on bonds that would make stocks look even less attractive.

This by no means suggests abandoning stocks, but rather seems to reinforce the idea of holding a balanced portfolio with a strong bond component.

And with the remarkable returns on stocks over the past couple of years, your portfolio may have gotten riskier than you had intended with more exposure to stocks, making some rebalancing worthwhile.

The new year can be a good time to remember that markets can be quite volatile — and certainly not as rewarding as 2024.

Schwab noted that “corrections” (a stock market decline of at least 10%) occurred in 10 of the 20 years ending in 2021.

Bear markets, defined as a 20% decline from near-term highs, are even scarier. There have been 10 bear markets since 1926 lasting an average of 1.3 years.

So, take the time to honestly consider how you would react to a sizable (and potentially scary) decline in your investments.

History argues that sticking with your portfolio and riding out market storms pays off, and that those who take on lots of risk when markets are euphoric (FOMO: Fear Of Missing Out) and make panic sales when they are scary (FOBI: Fear Of Being In) tend to do poorly. 

This is a good time to assess how much risk you need to take to reach your goals — and how much you can handle.

Then, take Buffett’s advice and avoid the forecasts like poison. Perhaps turn off the financial news and take a nice walk.