As forecastable as British weather
Over the past six months a rapid adjustment and write-down in the pricing of many risk-exposed and interest rate-sensitive assets has exposed fears of recession and slowdown. The rapidly changing position of global central banks and a reappraisal of consumers and investors in the underlying economy has cast a far different light upon the 2022 economy than many perceived at the start of the year. As you would have seen, the market adjustment to this changing state of affairs has been severe and very often disorderly. On top of the very quick adjustment in market pricing, the ongoing and unquantified nature of the changing tide leaves an as-yet unaccounted for risk: forecasts.
Financial markets are swamped with forecasts across virtually every asset class with participants not shy to declare their expectations for a particular target or outlook. Banks have swathes of analysts publishing their forecasts for their chosen assets to clients and the wider market alike. However, those forecasts by and large have not yet caught up with the adjustments we have seen in the last few months across most markets. Forecasting is complex and if done wrong can hold serious consequences for the publisher and their institution alike. Updating these forecasts is being delayed by a scramble to keep up with constantly evolving factors in the market, in an environment where the analysts in question cannot just throw caution to the wind.
Take the S&P 500, for example. Analysts’ forecasts have barely budged despite the market entering bear-market territory having fallen 20% from its December 2021 peak. This has left some stock price targets requiring a doubling or even tripling versus their current price to be fulfilled by year-end. Put simply, many forecasts out there today are useless if not counterproductive. That isn’t itself so much of an issue, however. What is an issue is what the updated forecasts will look like once they’re devised and published. Will they converge upon current pricing, perhaps signalling the end of the worst of the market rout and volatility? Or will they instead show the expectation of further price and value destruction?
As forecasts adjust to appreciate the current state the global economy is in, there is the delicate issue of how the market will react to revised forecasts. Forecasts published by those with skin in the game are important. They’re not just a nice analysis and explanation of what’s going on, they’re publications of an institution (and its client’s) that’s going to hunt for that particular price or target with their own money. The targets themselves are therefore an objective but also an admission of intent. A real and impending risk horizon across all asset classes will be how the market reacts as these forecasts start to pile in.
Discussion and Analysis by Charles Porter
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