Friday, February 19, 2010

Investment Pornography: 2010 Predictions

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

What’s in store for markets this year? Early predictions are mixed. The evidence for continued struggles is compelling. The evidence for recovery is compelling. A successful forecast must objectively account for all variables, such as interest rates, credit markets, real estate, foreclosures, regulation, global markets, unemployment, consumer behavior, government spending, taxation, etc. (not to mention the weather!!!) and apply the proper prediction and weighting to each. The evidence suggests the task is, at best, extremely difficult…

2009 will not make a forecaster’s resume!

Here are few of last year’s predictions and subsequent results. Predictions weren’t nearly as mixed. For reference, the market bottom was established March 9th2009.

Prediction: "Don’t be fooled by bear market rallies. It’s way too early to get back into U.S. stocks… Expect meltdowns in securities backed by credit card debt, home equity, student and auto loans as well as commercial real estate… Avoid emerging markets, especially China. China’s fiscal bailout contains lots of smoke and mirrors and social unrest is mounting."
Gary A. Shilling, "Field Day for Short-Sellers," Forbes, February 16, 2009.
Result: This article begins with the success of 2008 market predictions: "I hope you took my advice, because all 13 of the predictions turned out to be true". The article goes on to predict a dismal 2009. Probably should have taken the year off: March 1st - December 31st 2009:
  1. S&P 500 + 55%.
  2. MSCI Emerging Markets Index + 103%.
  3. The Hong Kong Small-Cap Index + 114%.
  4. The Hong Kong Value Index + 58%.
  5. Dow Jones US REIT Index + 101%.
Prediction: "Equity bulls can argue that each fresh low brings the market closer to a bottom, but this has been a constant and increasingly hollow refrain for more than a year. Moreover, attractive valuations, reflected in low price earnings ratios and dividend yields comfortably above 10-year government debt yields, are increasingly believed to represent ‘value traps’ for investors - in other words, they are cheap for good reason."
Michael Mackenzie and David Oakley, "No End in Sight for Equities’ Bear Hug," Financial Times, February 25, 2009.

Result: March 1st 2009 - December 31st 2009:
  1. Russell 3000 Value Index + 57%
  2. Dimensional Small Cap Value Index + 121%.
Still waiting for that value trap….
Prediction: "The economy’s green shoots have stopped growing…. Stocks can’t ignore the economy just yet. The data suggest still more bank losses, more uncertainty about government intervention and a longer recovery process than the consensus expects. ‘We don’t have a business-cycle recovery in sight…. You can’t rule out a 2010 recovery, but we have no objective evidence to support it.’"
Quotation attributed to Lakshman Acuthan, managing director, Economic Cycle Research Institute. Gongloff, Mark, "Stocks Still Can’t Ignore The Numbers" Wall Street Journal, March 2 2009.
Result: You get the picture… 2009 was a fantastic year for stock investors.
Dustin’s 2010 Prediction: If economic reports surpass market expectations, prices will rise. If recovery trails market expectations, prices will drop. Stocks will be volatile. Markets will be markets. Investors will be surprised. Diversification will reduce volatility. Went out on a limb didn’t I…
David’s 2010 Prediction: Dustin will be right.
Michelle’s 2010 Prediction: David will be right.
Summary: The consensus was unmistakably "bearish" one year ago. We have a ways to go to recover all losses, but 2009 was certainly a nice start. The experts did not see it coming. The point of this post is not to insult the experts. I respect most of them. Their research is extensive, sound and compelling. We share a similar passion. The results simply suggest they can’t account for everything… The market humbles those who listen….

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