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Why Forecasts Fail: 4 Must-Have Lessons For Every Investor

Casandra Andrews  |  February 6, 2023

How did forecasters get it so wrong? The answers actually hold a lot of important lessons for us as we look at evaluating stocks. 

The January jobs report released on Friday – with massive gains across a variety of sectors – threw many economists for a loop. They expected fewer than 200,000 new positions to be created. Instead, more than a half million jobs were added. 

“Friday’s stunning jobs report took everyone — from labor market experts to markets — by surprise,” says Sinem Buber, Lead Economist at ZipRecruiter. “Even labor market experts who were expecting a strong reading in light of the stronger-than-expected number of job openings and decelerating unemployment insurance claims did not estimate the total job gains to exceed 250,000. The reality was twice the high-end of the expected range.”

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So, exactly how did forecasters get predictions for the report so wrong? The answers actually hold a lot of important lessons for us as investors. Here’s a look at some of our favorite takeaways. 

They Paid too Much Attention to The News

Recent stories of layoffs at large tech companies (Amazon, Google, Meta, etc.) have garnered all the headlines as of late, but the number of people laid off by these companies was actually quite small when we compare it to the labor force as a whole. For example, Amazon laid off 18,000 workers, and while that’s roughly 6% of its workforce, it’s a drop in the bucket when we look at the entire U.S. economy. 

Some 12.1 million jobs have been added since January 2021, with a monthly average of 356,000 jobs created during the past three months. Growth was widespread across industries, according to U.S. Secretary of Labor Marty Walsh, with notable gains in restaurants and bars, retail stores, healthcare facilities, professional and business offices, and construction. The largest addition to the labor pool were people between the ages of 25 and 54, BLS data showed, and the unemployment rate also dropped to its lowest rate since 1969 – 3.4%. 

The Takeaway for Investors? Scary headlines shouldn’t guide your investing decisions. Ever. Your strategy and time horizon are the only things that should direct your path. Staying informed is great, but obsessing over every “sky is falling” headline is not. Slow and steady wins the retirement race. Acknowledge that there will be peaks and valleys, and wait for the next peak that’s coming.

They Didn’t Look at the Bigger Picture

There were 11 million job openings at the end of December 2022, about twice as many as job seekers. And we know that many laid off tech workers have already found other jobs, with so many openings. 

According to a survey from ZipRecruiter, 79% of tech workers who were recently laid off landed their new job within three months of starting their search, and 40% actually landed their next gig just a month after they began searching. Hardly enough time to spend their severance. 

With that said, there’s also another perspective worth considering: Preston Caldwell, head of U.S. Economics at Morningstar Research Services, isn’t sure the final jobs numbers will be as rosy as they appear now, in early February. He’s watching to see how potential revisions to the new report may shake out later this year. “There’s reason to think the (January) data could be over-estimating the job growth,” he says. “If you look historically at many key turning points in the data, the job growth ends up being revised down later – up to a year later.” We’ll wait and see how it shakes out. 

The Takeaway for Investors? When you’re watching one of your favorite stocks taking a beating in the market, it can be easy to get discouraged. You thought you picked a winner. But what’s your bigger picture strategy here? Ideally, you’re sufficiently diversified that a few losses here and there won’t derail your progress towards your end goal. The next time one or more of your investments takes a dip, think about those that may be performing well and all the different types of accounts and investments that are helping to secure your retirement.

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They Forgot Recent History

Many companies have been more reluctant to lay people off because hiring has been so difficult (and because hiring, in general, is very expensive). Research from the Society for Human Resource Management (SHRM) shows the average cost per hire was nearly $4,700 in 2022. Employers estimate the real cost to hire a new employee can be as much as four times the position’s salary. 

It’s no wonder that companies would want to retain top talent for as long as they possibly can so they can avoid the cost and hassle of re-hiring as soon as things turn to the positive again. 

The Takeaway for Investors? History is so important when we talk about investing. Why? Because knowing it helps keep us calm in the face of uncertainty. For example, the S&P 500 took two years to rebound following the Great Recession in 2008. And although those were a difficult two years, the market eventually bounced back, and investors who stayed the course saw the payoff. Also, the average stock market return over the last 100 years is 10%. Ten. Percent. History is on our side.

Forecasters (and Investors) Generally Follow the Crowd

No one wants to be the outlier — even in a crowd of economists. Same goes for most people (minus the contrarians, of course.) And investors often follow the crowd, too. Dr. Dan Geller, a behavioral economist and the president of Analyticom LLC, recently published the book “Build Your Wealth and Keep Your Health,” where he discusses why many people lose money in the stock market.

His research shows the human brain has two response modes – instinctive and analytical. “They see the job markers from Friday and they may go and sell stock because they panic,” Geller says. That can be a big mistake because it’s an instinctual decision that is not based on analytic and empirical facts.

“When it comes to financial decisions, we should always use our analytical response mode and avoid our instinctive response mode,” Geller explains. Using your instinctive response is “wonderful when you are out in the wilderness and a tiger comes by. Please run. But not on Wall Street.”  

The Takeaway for Investors? This one speaks for itself. Oftentimes its not following the crowd that pays the biggest dividends. 

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