Market Forecasting

Prediction of the
Financial Forum and Real Economy

Forecasting paves the way for a wholesome program of investment, whether in the financial markets or the real economy. To this end, the techniques of prediction run the gamut from the simple and casual to the complex and formal.

On the scale of rigor, the low end of the range includes a hunch by an investor that a newborn technology will create a vibrant market and render obsolete a mature industry. Meanwhile the opposite end of the spectrum is showcased by a software agent that predicts the price of a stock and learns from its mistakes in order to improve its performance over time.

An investor who wants to divine a market of any sort faces a daunting task. The stumbling blocks include the whims of human actors and the flukes of natural forces. A case in point is a ramp-up of the stock market to ditsy heights by a horde of berserk traders. Another sample involves the smackdown of a regional economy by a monstrous earthquake that knocks out a swath of manufacturing plants and power grids.

In a world racked by chance and chaos, the hapless investor is hard-pressed to peer into the future with any measure of confidence. Even so, the lack of clarity does not mean that anything goes. On the contrary, anyone with a smidgen of sense knows that some things are more likely to crop up than others.

In that case, a glimpse of the future is a matter of degree rather than category. For this reason, the meaningful question is not whether prediction is feasible, but to what extent the task can be achieved.

In a way, the forecaster encounters the same type of challenge in selecting a technique for prediction. More precisely, the apt approach happens to be relative rather than absolute. The best choice of method depends on a bunch of factors including the skills of the user and the thrust of the application.

To begin with, each approach has its strengths and drawbacks. Moreover a given method may work like a charm in the hands of one user but not another. For these and other reasons, the shrewd player weighs a variety of techniques before deciding on the right tool for the job in forecasting a market of any sort. 

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To some degree, an investor in any field has to picture the market ahead of time. To bring up a counterexample, a dull asset that offers measly returns in terms of capital gains as well as dividend payments is unlikely to make a good choice as an investment vehicle.

From a larger stance, an inkling of the future is required for thoughtful action in any domain. For this reason, the prudent player always forms some idea in advance of the prospects in store. A plain example lies in the investor who projects the outcome for a stock in terms of the total return over the next decade.

The story is similar even in the case of a short-term trader who buys and sells an equity within the span of a day or less. The vehicle of choice should have the potential to move, whether in the upward or downward direction, by a goodly amount. Otherwise the punter is bound to lose out over time due to the incessant drain of transaction costs such as the commissions paid to a brokerage firm.

The astute player also keeps in mind that no asset is an island unto itself. Rather, the status of the market depends to a greater or lesser degree on a slew of factors in the environment at large.

The external drivers spring from diverse tracts within the financial forum as well as the real economy. Despite the complexity of the driving forces and their impacts, though, the sage player makes a serious effort to pick out the crucial factors and sketch out the outgrowths downrange. In this way, sorting out the jumble of causes and effects is a springboard for thrashing out a lucid program of investment.

Drivers behind Real and Financial Markets

In the popular imagination, the world of investment is a rational place in which a multitude of human actors and natural forces play out their respective roles. An example lies in a stock whose path is thought to depend only on the outlook for the underlying business. Another instance involves the course of the economy which supposedly moves wholly in tune with large-scale forces such as technical innovation and internatonal trade.

From the standpoint of a detached observer, it might make sense to think of a market solely in terms of impartial forces and aggregate drivers. A case in point is the overall demand for a security, or the long-range trend for a commodity.

To be sure, the sweeping view is a convenient way to sum up a market and get some sense of the main factors at work. On the other hand, the coarse sketch painted in broad strokes can be nothing more than a caricature of the domain.

A lot of folks like to personify the financial bazaar and portray it as a sentient creature. Moreover the entity is often pictured as if it were an autonomous and unitary being with a single state of mind at any given time.

With this mindset, a commentator might declare that the market sprang to life or surrendered its gains; or that the bourse has been agitated or subdued of late; or that the mood in the ring is optimistic or broody.

In reality, though, the vivid images are of course only figures of speech. Despite the metaphors that pervade the arena, the wise player keeps in mind that no asset or market moves of its own accord.

In fact, from a strictly pragmatic stance, there is no such thing as a “market” in the usual sense employed by the mass of practitioners as well as observers. Instead, the moniker is simply a shorthand for the ferment of activity stirred up by the actors and forces in the arena.

When people refer to the action in the marketplace, they usually have in mind the price of an asset and perhaps the volume of trading as well. For a thoughtful person, however, a moment of reflection is enough to see that the patent features are simply the end results of a slew of drivers at work.

The prime movers in the arena take the form of human players as well as robotic agents. Despite the two-tone classification, however, the actors of the natural and synthetic kind are not fully independent.

The reason is that a digital robot is crafted by a human coder and overseen by a live mind, whether directly or indirectly. A case in point is a preset program that trades futures contracts in line with a clutch of decision rules laid down by a human expert. Another sample involves a newborn routine that has been spawned automatically in a virtual hatchery according to the principles of genetic programming.

Given this backdrop, the hurly-burly of the market is in the end governed mostly by the goals and urges of live beings. Furthermore, the decisions of the principals are subject to the foibles of human nature ranging from faulty assumptions to impulsive reactions.

Crux of Market Action

In the final analysis, then, the forecast of any market boils down to the prediction of human behavior. This precept applies to the augury of the financial forum as well as the real economy.

Granted, the behavior of the market also depends in part on a host of inanimate factors along with inert conditions. An example of the former is a drought that wipes out the autumn harvest and sends the price of grain through the roof. Meanwhile an instance of the latter concerns the date of maturity for a particular bond, a trait which is fixed at the outset when the security is first offered for sale by the issuer.

Looking at the big picture, the entire environment plays a fundamental role in the behavior of any asset. A case in point is a run-up in the futures market fueled by an upsurge of demand for natural resources in the emerging regions of the world. Another sample involves the slowdown of a national economy after the central bank nudges up the basic rate of interest.

More generally, a slew of factors determine the action in the marketplace. The drivers in play range from the microlevel of the individual investor and corporate firm to the macrolevel of the sovereign state and global economy. An example of the former is a financier who decides to buy up a public company with the help of a band of partners. An instance of the latter is a sea change in demographics as the ranks of senior citizens continue to burgeon all over the globe.

Despite the diversity of forces, however, the external drivers rarely – if ever – determine the movement of an asset by themselves. Rather, the course of the market springs from the actions of the participants, who make their moves based on a mishmash of personal concerns and impersonal factors. In the process, the germane issues run the gamut from the outlook for profits for a particular firm to the depletion of resources in the global economy.

By contrast to common wisdom as well as orthodox theory, the nubs of information by themselves do not determine the current standing or future turnout of any market. Instead, it’s the interpretation of the facts by the actors in the bazaar that plays the decisive role.

That’s how things work in general. To crank up the complexity, though, the primacy of human factors and wayward drivers turns out at times to be even more pronounced than usual.

All too often, the market is tossed around by wanton flukes in the form of godsends and setbacks. An example in this vein is the rollout of a new-fangled technology that consigns an established industry to the dustbin of history. Another showcase is a hurricane that conks out a major port, along with the breakdown of the local economy and the disruption of international trade.

Meanwhile the market also responds to lots of squishy things such as rumors and jitters. A case in point is an outbreak of delirium in the energy market which prods the speculators into bidding up the price of oil to batty heights. Another sample involves a whiff of scandal for a public company which prompts the madding crowd into dumping the stock en masse.

In these ways, the market is powered by a rich cocktail of inert ingredients as well as mushy inputs. For this reason, an investor who relies on a vapid approach to prediction based on simplistic models of sheer rationality is bound to be stumped and shocked, foiled and flustered.

Roundup for Forecasting

The market is a chaotic place where the natural milieu interacts with the human element in scads of knotty ways. Due to the endless hail of upthrows and knockdowns along with the tie-ups and bust-ups in the bazaar, the beleaguered player is hard-pressed to foresee anything with a measure of assurance. That’s the bad news.

The good news is that a host of patterns hold sway amid the pandemonium of noise and smoke, whim and chance. For this reason, many an outcome can be foreseen to a greater or lesser degree. The capacity to sweep away the haze and peer into the future to some extent is a cheery prospect for the canny investor who takes a cogent approach to forecasting.

From a practical stance, the best approach to prediction depends on the profile of the seeker as well as the nature of the task at hand. For starters, every technique has a unique combo of strengths and limitations. Moreover a given tool may work wonders for a particular user but not for the next person.

Given this backdrop, the earnest player takes the time to grasp the relative merits of a potpourri of techniques. Armed with a rounded trove of knowledge, the deft investor can pick the right tool for the job in forecasting the financial markets as well as the real economy.