Why Wall Street Stinks at Predictions

"In 2021… investors may actually find it tougher to generate the kind of stock market returns we saw last year in the midst of COVID-19."

— Andrew Slimmon, Morgan Stanley Head of Applied Equity Advisors, January 2021

Wall Street pros are notoriously bad at making stock predictions. Imagine Mr. Slimmon's surprise when last year's S&P 500 return of 18.4% got trounced by this year's 28% surge.

But that won't stop finance's best and brightest (and sometimes, most forgetful) from making guesses anyway. This year, Morgan Stanley is doubling down with a -6% expected decline in U.S. stock markets. Wonks at Bank of America are also bearish again, despite their 2021 misfire.

The Key to Better Predictions

These guesses fail because they attempt to predict the S&P 500, a group of 500 large-cap U.S. companies with 500 different outlooks for the year. Getting the exact figure right is a fool's errand.

I do, however, have good news for you.

The corollary is that specific stock events are easier to predict. What do I mean by that? Here are a few examples:

• Airline leisure travel will eventually rebound as Covid-19 runs out of un-immunized people to infect

• Electric vehicle sales will rise as carmakers introduce new models

• 5G speeds will increase as more high-capacity towers are installed

I know these aren't exactly groundbreaking — I might as well have predicted that my birthday will fall on a Monday in 2022 (spoiler alert: it does). But combine specific stock events with specific domain knowledge, and you end up with some truly useful predictions that could shape the stock market in 2022 as we know it.

3 Predictions for the Stock Market in 2022: Marijuana Stocks Have a Meme Moment

It's been a hard year for marijuana companies. The $Advisorshares Pure Cannabis Etf(YOLO.US)$ has fallen nearly 20% this year and is down 45% since its inception (The ETF sponsors may have been onto something by naming their fund "YOLO").

Even Moonshot picks have been muted. Despite earning a positive return, my long-short portfolio in cannabis looks somewhat ho-hum compared to other standout sectors this year.

Things will change in 2022.

Republicans are warming to weed. Nearly half of Republican voters support federally decriminalizing cannabis, and GOP lawmakers are now beginning to reflect their constituents' view by increasingly supporting broad legalization at the state and federal level"

-write Natalie Fertig and Mona Zhang of Politico. 

It's especially true at the state level. In 2021, 13 states had marijuana legalization bills on their dockets, according to marijuana aggregation site Leafly. Five of them passed legalization for all adults, while another seven seem poised to do so in 2022.

The mood on Capitol Hill is also shifting. Democrats increasingly see legalization as a way to raise taxes to pay for infrastructure, while Republicans see it as freedom for a new generation of entrepreneurs.

"Hold" Your Horses

Now, I wouldn't expect Federal legalization anytime soon, exactly. Senate minority leader Mitch McConnell has long stonewalled the various legalization bills, and Republicans at the national level won't support any issue that's traditionally seen as a Democrat priority.

But we know that meme investors are an optimistic bunch. $Tilray(TLRY.US)$ and $Sundial Growers(SNDL.US)$ both went bananas in early 2021 when newly-promoted U.S. Senate leader Chuck Schumer spoke about legalization. And many weed-happy investors are still holding onto their positions. So don't be surprised when these stocks make a meme-able comeback in 2022 when legalization hopes reemerge.

Bottom line: double up on cannabis meme stocks the moment your favorite senator next mentions weed legalization.

Prediction 2: Traditional Banks Struggle Against Crypto Finance

One of my very first assignments as a young stock analyst was to study the emerging world of Chinese banks. These fast-growing institutions were only matched by the blinding speed of the economies they served (it's easy to forget that 10% GDP growth used to be low for the People's Republic).

Meanwhile, U.S. bank stocks have fallen behind, especially in the aftermath of the 2008 financial crisis. Without the ability to raise leverage, their return on equity has sagged even as the return on assets has remained stable:

(Return on Equity) = (Return on Assets) * (Financial Leverage)

2022 will be yet another year where fintech companies outperform their slower-moving predecessors.

Consider mortgage underwriting, a lucrative business that banks once jealously guarded. As capital requirements for originating loans have increased for banks (but not for non-banks), companies like $Wells Fargo & Co(WFC.US)$ have retreated from the business. Non-bank companies like $Rocket(RKT.US)$ now make up almost two-thirds of U.S. mortgages, according to data from The Economist.

Now, banks have a new challenge:

Cryptocurrencies.

• Loans. Outfits from$Coinbase(COIN.US)$ to $Celsius Holdings(CELH.US)$ look to offer peer-to-peer lending.

• Payment Management. $Block(SQ.US)$ and Crypto.com (CCC:CRO-USD) are attempting to let you bypass banks and use crypto instead.

Many traditional banks have been racing to catch up. According to workforce data firm Revelio Labs, big banks have added 1,000 new cryptocurrency-related roles since 2018. Stock trading firms from Fidelity to $Charles Schwab(SCHW.US)$ are also getting in on the game.

The big winners, however, will likely be the younger upstarts. Free from the rules and regulations that slow the big banks, companies like POSaBIT (OTCMKTS:POSAF), Crypto.com and perhaps even $Twitter(TWTR.US)$ will find 2022 another highly rewarding year.

Bottom line: 2022 will be the year of high-quality fintech plays like Crypto.com and POSaBIT.

Prediction 3: Macro Cycle Moves to Trend (and Healthcare Outperforms)

In June, I forecast that speculative companies like metals and mining would outperform thanks to inflation. Crypto and meme stocks would also do well thanks to increased consumer confidence — no one's buying Shiba Inu (CCC:SHIB-USD) when they're having trouble putting food on the table.

Fast forward to December, and these broadbase calls have proved correct. $Alpha Metallurgical(AMR.US)$ — a coking coal company of all things — has seen shares almost double since that call.

As we round into 2022, I'm updating that macro call:

We're moving from the local peak back to trend growth.

"Amateur crowd has been suffering from a crisis of confidence of late," noted Denitsa Tsekova of Bloomberg Markets on Tuesday. "Their beloved speculative stocks [are] falling out of fashion … on monetary-tightening bets."

That crisis of confidence has also spilled into meme coins, with tokens like Floki Inu (CCC:FLOKI-USD) failing to keep up with Bitcoin's (CCC:BTC-USD) recovery.

That's not all bad news. Investors shifting to more cautious investment approaches usually increases the value of consumer staples (i.e., Clorox (NYSE:CLX) and Kleenex), telecom (i.e., 5G stocks)…

…and healthcare.

Regular Moonshot readers will know I love biotech bets, especially when insiders are buying. $Longeveron(LGVN.US)$ is up 6x since I recommended the stock in October, and several others look set to do the same.

As Wall Street dials back its IT and crypto bets, investors can expect more capital to flow into healthcare. And with a New Year's "top picks" countdown lined up, you can be sure that biotech will be on Moonshot's "nice" list too.

Bottom line: Healthcare stocks should outperform in 2022. Stay tuned for Moonshot picks in the coming weeks.

How to Improve Predictions

In 1818, publisher Jacob Mann got to work on the first edition of Farmer's Almanac. The journal included a blend of long-range weather predictions, humor and general advice, but it was never meant to be an authority on long-range forecasting.

Their weather prediction model humorously claimed to utilize an "exclusive mathematical and astronomical formula, that relies on sunspot activity, tidal action, planetary position (astrology) and many other factors." Its accuracy reportedly hovers at around 50%.

Meanwhile, modern-day weather forecasting has rocketed ahead. Five-day forecasts are now 90% accurate, according to government data (the other 10% is reserved for the days I get rained on at the beach). These methods replaced wild guessing with a combination of first principles and mathematical modeling.

They also understand the limitations of forecasting. Hurricane paths still follow a "cone of uncertainty" rather than a straight line, and rain forecasts are given as probabilities rather than as hard figures.

Stock analysts should also think that way. Because when wonks at Morgan Stanley are predicting the S&P 500 down to the closest 100 points, they look more like people using an "astronomical formula that relies on sunspot activity, tidal action, astrology, and many other factors." Better to provide accuracy where they can guarantee it.