I am so depressed my forecasts will be great

Analysts are an optimistic bunch. Every portfolio manager knows that on average, analyst estimates for future earnings growth or target prices of stocks tend to be too optimistic. The problem is, though, that this optimism isn’t constant over time. Hing Qian has looked at analyst optimism in the 1990s and found that in times of high investor sentiment, analysts tend to be more optimistic in their forecasts than in times of low sentiment.

Equity analysts and investors don’t exist in a vacuum and when things are going well, both groups become more and more optimistic about the future. This overoptimism then drives analyst forecasts to ever-increasing heights and as a result to lower accuracy. Because we are all human, we are all at risk of being carried away in a bull market and becoming depressed in a bear market.

On the other hand, being depressed or pessimistic is something that has many advantages in life. For one, you tend to have many more positive surprises. 

And it seems there is one more advantage of being depressed – at least if you are a professional equity analyst: Your forecasts are getting better. A new study looked at the general mood in society and correlated that with the accuracy of equity analysts’ forecasts. They found that in times when more people feel depressed, analyst forecasts tend to get better and forecast errors decline significantly. Of course, the hypothesis is that if more people feel depressed then some of them will be analysts. And we know that depressed people tend to process information slower and in smaller increments and thus work through problems more carefully, which is beneficial for higher forecast accuracy.

So, if you are an analyst and you are feeling blue, it is time to make some forecasts. They will be so good they will definitely cheer you up, which of course means that the next set of forecasts you make will be terrible. You can’t win. Which should make you feel so depressed…