5 times through history the experts got their economic predictions wrong

Two experts analysing financial data

The engineer Robert Metcalfe helped pioneer the internet in the 1970s, but he had little faith in its future. In 1995, he predicted that the internet would “go spectacularly supernova, and in 1996 it would catastrophically implode.”

We know, of course, that it didn’t implode. It was one of the most transformative inventions in modern history, so how did one of the pioneers of the technology misunderstand it so spectacularly?

People often look to economic experts to help them make financial decisions. But, you should take what they say with a pinch of salt because, like Metcalfe, they can get it very wrong.

Experts can’t see into the future, and the factors affecting economies are too numerous and complicated to predict with accuracy every time. Sometimes, so-called gurus can make slight misjudgements, but there are plenty of times when they miss the mark altogether.

Here are five historic examples of experts getting their economic predictions catastrophically wrong.

1. The Wall Street Crash

The Wall Street Crash is remembered as one of the most significant financial events in history, with global implications that stretched on for decades.

On 28 October 1929, now known as Black Monday, the Dow Jones Index dropped 12.8%. The following day, it dropped another 12% and the world was plunged into the Great Depression.

According to Britannica, industrial production in the US fell by 47% and GDP dropped 30% during the Great Depression. The global implications were huge, and it even contributed to the start of the second world war.

Unfortunately, even the most renowned experts failed to predict it.

Irving Fisher is an incredibly influential economist who developed many theories that underpin our understanding of economics. But he is often associated with a huge misstep prior to the Wall Street Crash.

He claimed that “stock prices have reached ‘what looks like a permanently high plateau’.” Three days later, the entire US economy collapsed. Even a world-leading economist and theorist completely misunderstood the market growth that was happening in the lead-up to the crash and failed to see that disaster was about to strike.

2. The 2008 financial crisis

Experts did not learn from Fisher’s miscalculation about the Wall Street Crash and the same thing happened again in 2008. Economists were aware of potential problems with sub-prime mortgages, but the fears were always downplayed.

When borrowers started defaulting on payments, generating talk of a crash, economic commentator Ben Stein took a different view. He said “You can panic if you enjoy being panicky. But this will all blow over and the people who buy now, in due time, will be glad they did.”

But they weren’t glad. The housing market collapsed, and the knock-on effect brought huge financial institutions like Lehman Brothers to their knees. The result was a financial crisis that impacted economies across the globe.

3. The 1990 recession

Poor predictions about financial crashes and recessions go both ways.

Ravi Batra’s 1985 book was originally called Regular Cycles of Money, Inflation, Regulation and Depressions. But by the time it hit the New York Times bestseller list a few years later, it had been reprinted with the new title, The 1990 Recession.

This title change was a mistake because, as we know, the predicted recession never happened. In fact, the 1990s was a relatively stable period. So, it seems that there is no definitive formula for predicting big economic shifts, and experts may get it wrong.

4. Y2K

Y2K is perhaps the biggest anti-climax in recent history, but at the time, experts predicted an unprecedented disaster.

Computers were programmed to note the year with only two digits. This raised big questions about what happens when we hit the year 2000, with many experts warning that computers would think it was the year 1900.

It was believed that databases in large financial institutions like banks could be reset, meaning that people would not be able to withdraw funds or make transactions of any kind. Some banks worried that interest would be calculated for 1,000 years, rather than a single day.

The same fears existed on the stock market, and many experts believed that Y2K would bring trading to a standstill.

Equally, businesses were preparing to absorb massive costs to fix the Y2K bug. According to a report from the US government, General Motors estimated it would cost them $565 million, and Citicorp expected to spend $600 million.

The report also stated that the Y2K bug could “precipitate a recession” if preventative measures were not put in place.

But when the millennium arrived, it came and went with very little disruption. Although there were some internal technical glitches, the huge disruption and resulting economic downturn never happened.

5. The dot-com bubble

Many people correctly predicted that the internet would transform society, and investments in tech start-ups skyrocketed in the 1990s. According to Investopedia, the Nasdaq index rose five-fold between 1995 and 2000.

Some experts predicted that this trend would continue indefinitely, and in 1999, economists James Glassman and Kevin Hassett published a book called Dow 36,000. In it, they told investors that there was still time to benefit from an upward move in the markets because this was only the beginning and stocks were in the midst of a one-time-only rise.

But by 2001, the bubble had burst, and stock values plummeted. A lot of the early internet start-ups collapsed, and it took another 15 years for the Nasdaq index to reach the same peak again.

Experts don’t always know best

Experts might speak with confidence, but they sometimes get it wrong, so don’t let their predictions cloud your judgement.

Open any newspaper or financial website, and you’ll be bombarded with opinions and tips from experts. From people talking up the economy to providing specific share tips, it’s easy to become overwhelmed by the sheer volume of opinion that is available.

It’s important to remember that a single event or market shift shouldn’t dictate your long-term financial goals. Dips and troughs are natural, and the markets typically recover over time, so it’s important not to let expert predictions worry you.

It’s also important to remember that your financial goals are unique to you, and that’s what you need to focus on. One of the big benefits of working with a financial planner is that we can discuss your goals with you and create a tailored plan to help you achieve them.

Always look at the big picture and consider long-term strategies instead of listening to and immediately reacting to experts and their predictions. If you need guidance, we are here to help.

Email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.