Embrace the Uncertainty

Predictions Gone Wild

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The stock market has predicted nine of the past five recessions.

Paul Samuelson

Investing is incredibly difficult. It looks easy from the outside until you start adding in emotions and biases and have real money on the line. The 2021 playbook was to just buy stuff that goes up and sell when it stops going up, easy peasy. In contrast, 2022 has been an investing hellscape.

What makes investing so difficult is the vast amounts of information moving around constantly. People can build models and have price targets and do a DCF analysis to determine the value of an investment. But there are so many variables and inputs that it's hard to feel confident and remain resolute in your theses, especially in our current macro environment and high inflation.

We should never feel 100% confident in our predictions. They are calculated bets on future outcomes. This post looks at some predictions from the past year that turned out to be completely wrong. Note: This isn't to throw anyone under the bus, but rather to highlight how difficult it is to make market predictions, even for the so-called experts.

Mortgage Rates

I mentioned in my house build blog post that I knew back in November of 2021 the Fed was going to raise interest rates, Powell told us. So I did what was responsible and planned for higher rates on the new build. I just didn't think they would double in the first half of 2022. No one did. Not even the Federal Reserve or the Mortgage Bankers Association (MBA).

The 30-year fixed mortgage rate declined last week from 7.08% to 6.95%, even after the Fed confirmed its fourth 75 bps raise in a row.

Now, compare and contrast the MBA Mortgage Finance Forecast from December 2021 vs the latest release from October 2022.

Instead of highlighting the home sales numbers and 10Y treasury yield projections (that were also way off), I'd like to focus solely on the 30-year fixed mortgage rates. The MBA predicted back in December of 2021 that we would see 4% in Q4 2022, we've already hit 7%.

Now look at the future projections heading out to 2023 and later. They're showing a 5.4% 30-year fixed rate in 2023, then dropping to 4.5% for 2024 and 2025. If you only looked at this data in a vacuum and were looking to purchase a home, you could say at the current ~7% rate, it would probably be a good bet to do a 5/1 or 7/1 ARM (not investment advice at all). That is if you have any level of conviction that these predictions would come to fruition. However, without looking at the first chart highlighting how badly they missed on this year's predictions, you're just doing yourself a disservice.

Fed Pivot

Pivoting to the Fed (see what I did there?), it's time to look at how awful their predictions have been the past year.

Even with all of the data in the world, the Fed couldn't even come close to hitting any of their predictions. Trust the experts!

Take a look at the Federal Reserve's Summary of Economic Projections, published on December 15, 2021.

The only thing they got right on this chart was the unemployment rate. Not bad!

Now look at the FOMC participants' assessments of appropriate monetary policy via their famous dot plot chart. LOL. The 75 bps hike last Wednesday took the target rate range up to 3.75-4.00%, which is now higher than any single FOMC participant predicted out until 2024 and the longer run.

I'm sure it's just a transitory bad stretch and they'll earn back their credibility soon enough.


Here is a summary of some analysts' forecast for the S&P 500 index at the end of 2022 (published in January 2022):

The lowest target on the list above was 4,400. Out of the 214 trading days so far this year, only 50 of them have been above that level. In fact, we haven't traded above that level since 4/20.

An analysis by the NY Times noted the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points — which was more than double the actual average annual performance of the stock market.

Bet on the Metaverse

Which stock do you think has the worst year-to-date return in the S&P 500? Did you guess META? Me neither. But that's what it is. Over $687 billion in market cap evaporated so far this year.

Here are the worst 10 performers in the S&P 500 YTD.

Now contrast that to the top 15 best performers in the S&P 500 this year. You can clearly see energy names have taken front stage. Just as everyone (no one) predicted.

From 0 to 100%

A US recession is effectively certain, according to a recent Bloomberg model projection.

The latest recession probability models by Bloomberg economists Anna Wong and Eliza Winger forecast a higher recession probability across all timeframes, with the 12-month estimate of a downturn by October 2023 hitting 100%, up from 65% for the comparable period in the previous update.

The Bloomberg Economics model uses 13 macroeconomic and financial indicators to predict the chance of a downturn at horizons of one month to two years.

While the chance of a recession within 12 months has reached 100% under the model, the odds of a recession hitting sooner are also up. The model forecasts the likelihood of a recession within 11 months at 73%, up from 30%, and the 10-month probability rose to 25% from 0%.

When did models start spitting out 100% certainties even with perfect backtests and large sample sizes? What happens if this model turns out to be false, even though it's predicting a 100% chance of a recession? Probably nothing because no one is ever held accountable for making mistakes and it makes for good clickbait.

Models like this should never be 0 or 100%. They can be 1 or 99% if they're exceedingly confident but should never be taken to the extreme. There should always be a degree of uncertainty.


  • When it comes to predictions, whether from an economist with 40+ years of experience under their belt or your crazy uncle who watches Fox News every night, we need to be prepared to embrace the uncertainty.

  • Use expert predictions as one datapoint among many to build your own prediction and mental models.

  • When building models, our inherent behavioral biases cause us to make bad decisions and to look for meaning when there is none.

I want to leave you with a few corresponding thoughts from Thinking In Bets:

We would be better served as communicators and decision-makers if we thought less about whether we are confident in our beliefs and more about how confident we are.

Incorporating uncertainty into the way we think about our beliefs comes with many benefits. By expressing our level of confidence in what we believe, we are shifting our approach to how we view the world. Acknowledging uncertainty is the first step in measuring and narrowing it. Incorporating uncertainty in the way we think about what we believe creates open-mindedness, moving us closer to a more objective stance toward information that disagrees with us.

We are less likely to succumb to motivated reasoning since it feels better to make small adjustments in degrees of certainty instead of having to grossly downgrade from "right" to "wrong". When confronted with new evidence, it is a very different narrative to say "I was 58% but now I'm 46%." That doesn't feel nearly as bad as "I thought I was right but now I'm wrong."

Our narrative of being a knowledgeable, educated, intelligent person who holds quality opinions isn't compromised when we use new information to calibrate our beliefs, compared with having to make a full-on reversal. This shifts us away from treating information that disagrees with us as a threat, as something we have to defend against, making us better able to truthseek.

Annie Duke

*Investing in securities involves risks, including the risk of loss. Composer Technologies Inc., SEC Registered RIA. All charts and symbols are provided for illustrative purposes only and are not intended as recommendations to purchase or sell any security and do not reflect actual market conditions, stock performance, or AI decisions. This is a paid endorsement for Composer.