How the ‘Magnificent Seven’ misleads

ALL models are wrong, goes the statisticians’ adage, but some are useful. This time last year, plenty of pundits’ models started looking more wrong and less useful.

The consensus forecast was a grim spell for economic growth and a dreary one for stock prices – and that was before a clutch of American regional banks buckled. Higher interest rates seemed set to cause pain everywhere. Instead, in the very country where the banking turmoil unfolded, the stock market began to soar.

By the summer America’s S&P 500 index of leading shares had risen by 28 per cent from a trough hit the previous autumn. Analysts hunted for a new model to explain what was going on, and the popular choice revolved around the “Magnificent Seven”.