Why do some investment firms publish their market predictions?

Question

Investment firms often publish their market predictions. E.g. JPMorgan Sees S&P at 3,900 If Trump Wins Election (mirror 1, mirror 2) (no intent to comment on US politics, I'm not a US citizen anyway). Why do they publish their market predictions instead of keep them for themselves to maximize their profits (assuming they view their predictions as better than random)?

Another way to rephrase the question: why pay for people if their findings are made publicly available?

Perhaps you're assuming that market predictions from investment firms are accurate? If that were the case, why do they often have to write down large losses in a bad market? Why would they lose money in bear markets if they had a clue? Why? Why? Why? ;->) — Bob Baerker, Oct 28 '20 at 22:09
@BobBaerker No assumption on the accuracy :) Another way to rephrase the question: why pay for people if their findings are made publicly available? I'll edit the question to make it clearer. — Franck Dernoncourt, Oct 28 '20 at 22:13
It's beyond the confines of this space to explain why some people use full service brokers. They surely do make a lot of money by luring people into their web. For some, those extra fees might be worth the additional services. But outperformance? I think not. — Bob Baerker, Oct 28 '20 at 22:22
Not an answer because of pure speculation: If such a prediction has weight in the eyes of others, it might produce a predictable effect on the market, which could be leveraged. — orithena, Oct 29 '20 at 13:28
What @orithena said. The best way to create (and profit from) a self-fulfilling prophecy is to come up with some predictions, arrange your own investments accordingly, and then publish your predictions. If you're big enough to be taken seriously, then a lot of small/independent investors may blindly follow, rendering your predictions true (or true enough for you to turn a profit). Though a prediction as broad as "entire index at X if Y is elected" isn't really useful for that. Has to be more like $10 stock will be at $15 soon (and I just bought a bunch at $8). — aroth, Oct 30 '20 at 01:56
Why would they not? If you were a potential investor, would you prefer to put your money in the hands of people who did, or did not publish their predictions? — Robbie Goodwin, Oct 30 '20 at 02:05
Related: Is equity research from large banks reliable?, Why should I trust investment banks' ratings?, Do stocks that are highly rated by analysts tend to outperform index funds historically? — Flux, Nov 09 '20 at 00:33

score 36 · Answer 1 · answered Oct 29 '20 at 01:28

36

They do so because it’s free advertising. If they get it wildly wrong, it will be totally forgotten —- it’s not news when a prediction fails to come to pass. Unfortunately, it is often considered news when prediction does come to pass, or even comes close. If it is at 3,850 they will be in the news (again) as being amazingly accurate. If it’s 2900 or 4900, they won’t be called out on it.

Their business is investing other people’s money, if they made perfect prediction that would be a waste of resources. Making non-specific (and of course non-binding) predictions public is just another way to get their name out there and get people to use their services.

answered Oct 29 '20 at 01:28

jmoreno

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It reminds me of the prediction scam: "A scammer picks an event with a typically binary result, such as a sports event: win or lose. Starting from a pool of (say) 32 people, the scammer contacts half the people and predicts one result, predicting the opposite result to the other half. The event occurs, and the scammer must have given the correct prediction to 16 people. Those 16 are now split into two groups, and the scammer repeats the process, and then repeats the process again. Now four people are really, really convinced of the scammer’s predictive powers." – Eric Duminil Oct 29 '20 at 09:00
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@EricDuminil And if anyone is interested in watching that play out on TV: https://derrenbrown.co.uk/shows/the-system/ – Michael Oct 29 '20 at 11:02
@EricDuminil The scam only works if none of the victims know each other and share their results, and only works for a limited amount of time (you can't keep splitting forever). It also probably loses its effectiveness if you build your business by customer referrals, as many financial planners do. – Barmar Oct 29 '20 at 14:47
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@EricDuminil Improved heuristics: The scammer keeps giving predictions to the losers. To the top half of the bell curve, he can say he gets it right better than random chances, to the lower half he can show his disclaimer and the waiver of judicial means in favor of arbitration. Humm.... – Mindwin Remember Monica Oct 29 '20 at 18:18
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@EricDuminil All scams only work for a limited amount of time, because the scammer eventually harvests the profits and moves on to a new scam. – barbecue Oct 29 '20 at 18:52
@EricDuminil It works when the victims don't know each other, and for an indefinite amount of time, if the scammer can persuade the victim to allow them to publish the fact that "Mr X turned $10 into $10m because of our successful predictions." (And the persuasion is often easy, since most people would like to be famous for something). – alephzero Oct 30 '20 at 16:33

score 12 · Answer 2 · answered Oct 29 '20 at 14:52

Besides the publicity angle, there's also the possibility that a company could use these predictions for more direct profit. Consider the following:

Buy up lots of stock at $50/share
Publish that you predict that stock will get to $70/share
Wait for people following your advice to start pushing the stock price up
Sell the stock when it gets to $70/share. (or even $60/share)

In your particular case, they're not dealing with a single stock, but there might still be some manipulation -- trying to get people to vote for a specific candidate, without having to directly endorse that candidate.

In the case of this article, there's bias by omission -- to quote the article, highlighting two portions:

A victory for the Republican candidate could push the S&P 500 to as high as 3,900 at year-end under the most optimistic case laid out by Dubravko Lakos-Bujas, the bank’s chief U.S. equity strategist. ... While a number of traders have come to consider a Democratic sweep followed by a prompt fiscal deal among bullish scenarios for the equity market, Lakos-Bujas disagrees, seeing Trump’s victory as the most favorable outcome.

So, by only showing the "most optimistic" of all predictions, they may be cherry picking the data.

Assume we have a some scenario that we want to influence the outcome. Estimates are that Outcome A will result in an S&P increase of 8-12%, normally distributed. But for Outcome B, we have a wider range of predictions, and it's 3-13%, also normally distributed. But we can pick the outlier for B, and publicize that. So instead of comparing the means of 10% vs. 8%, we report on "most optimistic case", and compare 12% vs. 13%.

+1 for the crucial point that in stock predictions interests align — Lykanion, Oct 29 '20 at 15:05
@Lykanion : yes, and technically it's not manipulation if you really think it's going to happen ... but by advertising to the world this possibility, and get other people to buy into the stock, you might be able to claim your profits sooner so you can then free up the money to invest elsewhere. And you help to hedge against the possibility of future unfavorable news causing you to revise your forecast before it's hit the value you predicted. — Joe, Oct 29 '20 at 15:21
This method is known as "pump and dump" and it is illegal. Do you have any evidence that these companies engage in this illegal activity? If yes, why aren't they in prison? If no, why are you so sure that they are doing this? — Philipp, Oct 30 '20 at 09:24
@Philipp : I'm not "sure". I even said "there's also the possibility". And yes, I'm familar with pump and dump. But it's not illegal if you're not making false or misleading statements. I would assume that any company making such predictions would have research to back up their predictions. But still, they were in first, and thus had the opportunity to buy the undervalued stock before others noticed. And then getting people to notice pushes up the prices, as they predicted. — Joe, Oct 30 '20 at 12:30

score 4 · Answer 3 · answered Oct 28 '20 at 23:24

Why do they publish their market predictions instead of keep them for themselves to maximize their profits

Publicity.

Further:

(assuming they view their predictions as better than random)?

In my opinion, they actually fully know that such predictions are comic, but that it's part of the publicity/investment business complex.

Thus, when dealing with the highest level marketing folks, at the biggest name companies, they're attitude is absolutely no different whether selling beer, Investments or cars. They don't "believe" what they're saying, they just (in each industry as relevant) Emit Stuff in a polite and professional manner, in accordance with the patterns of the industry, and of course you don't overtly lie or break any standards or codes in that industry/jurisdiction.

I would add in most cases it gives the sales guys something to talk to clients about. Someone puts together vaguely interesting slightly irrelevant research which can be used as an ice breaker/reason to call a client. — David Waterworth, Nov 01 '20 at 05:27

score 0 · Answer 4 · answered Oct 30 '20 at 03:12

Leaving aside the question of how accurate these predictions are, since that's already been discussed in other answers: prediction is only half the picture. A large part of investment is figuring out how to use those predictions once you have them ("portfolio analysis").

If you knew exactly what the market was going to do, you'd just pick the investment with the best return and put all your money into that. But market forecasts are probabilistic, not certainties, and they're complicated probabilities because of non-independence - e.g. investing in five different fuel companies is a higher risk strategy than diversifying across five different industries.

Why do some investment firms publish their market predictions?

4 Answers4