Foggy Crystal Balls

 

 

It's a good thing that advisors aren't paid to predict the future because, well, nobody

seems to be doing a very good job of it lately. I hope you'll remember this as all the

major financial magazines come out with their yearly "Here's what will happen in 2010"

cover stories.

Reading through some back issues, we find that at this time two years ago, nobody,

anywhere, was predicting a 4th quarter meltdown in the investment markets, or the

global economy tottering on the edge of disaster. In fact, not a one of the

prognosticators seems to have realized that the U.S. economy had already fallen into a

recession.

If you read the magazine issues in early September, right before the markets suddenly

went into a 400-point free-fall in two trading days (triggered, you probably remember, by

the collapse of Lehman Brothers, the AIG bailout and the federal rescue of Fannie Mae

and Freddie Mac), you realize that nobody had a clue that a storm was brewing on the

horizon. The Wall Street Journal talked confidently about Lehman's efforts to secure a

line of credit or divest some assets, and the consensus seemed to be that the damage

from the burst housing bubble had been safely contained. Postmortem articles about

the crisis show that the Federal Reserve Chairman Ben Bernanke and Treasury

Secretary Hank Paulson, who both watch the economic numbers DAILY, were caught

totally flat-footed.

Closer to home, in January of 2009, economists and pundits were talking about the

possibility of a sustained market drop similar to the slow investment torture the

Japanese have experienced since 1989. Kiplinger's magazine identified the people

who had been most right in their 2008 predictions and asked them what they thought

was going to happen in 2009. Not a one of them predicted what actually happened: a

dramatic rise in stock prices (the S&P 500 touched bottom on March 6 with an intraday

price of 666.79 and rose to over 1,100 currently), a sharp (albeit temporary) rise in the

dollar and an end to the economic recession--what economists are now describing as a

jobless recovery.

Here's what they actually said. David Tice, chief equity strategist for Federated

Investors, told the magazine's readers that "The dollar will decline, and it's very possible

that inflation will pick up. The S&P 500 index could easily fall to 450 or so. This will be a

longer-term decline," he added, and gave the worst advice possible for investors over

the next three quarters, saying that "Investors should be selling equities and conserving

cash."

Bob Rodriguez and Tom Atteberry, of First Pacific Advisors, confidently predicted that:

"The upturn won't come until 2010, and when it does, it will look very sluggish and

lethargic."

Economist Nouriel Roubini told Kiplinger readers: "I expect that the recession will be

very severe and that it won't be over before the end of 2009. I think there is a further

15% to 20% downside risk for global and U.S. stocks, and a further 15% to 20%

downside risk for commodity prices. So 2009 will be a year of recession and deflation."

Peter Schiff, president of Euro Pacific Capital, missed the appreciation of the dollar, the

dramatically low interest rates and the economic recovery--all in a couple of sentences.

"The dollar is going to resume its fall," he said, "leading to a resurgence in the bull

market in commodities. That will pierce the bubble in the bond market, causing interest

rates to go up. So we're going to be in a depressionary environment, but with rising

prices and rising interest rates. Our economy will be a mess for years and years to

come."

The worst advice was being given right at the bottom in March, when global stock prices

were about to reward patient investors with an amazing rally. Consider this evaluation

from the March 5 issue of Business Week magazine:

All told, more than $10 trillion of stock market wealth has vanished, and with it the

confidence that springs from financial security. "We are looking at a 60% to 70%

chance that this bear market is not over," says Robert D. Arnott, chairman of Research

Affiliates, a Pasadena (Calif.) firm that manages $25 billion.

The article went on to predict "more debt busts and government trial and error until

things get set right again. That could mean two more years of bouncing around and

then another six or so before the Dow is back above 14,000. Not long ago, such an

outcome would have seemed unimaginably bleak. Given the other possibilities, it

doesn't seem so bad now."

The hardest part about investing is controlling the natural urge to sell when the market

has cratered, or to buy when the market is euphoric. But that's like going to the mall

and waiting to buy until all the sales are over and prices have gone up, and then, as

soon as the store has its next 25% off sale, going back and selling whatever you

bought. Nobody would even think of doing that with their holiday gift purchases, but it's

normal behavior in the investment markets.

The unhappy truth is that nobody can foresee the future, and the investment markets

tend to be far less predictable than other areas of our lives. Like it or not, we venture

blindly forth every day, control what we can control (investment costs, taxes and

savings rates), and generally make more money in the upturns than we lose in the

downturns. Years ago, a pundit threw up his hands and said: "I don't know what the

markets will do tomorrow, or next week, or next month. But I do know, with certainty,

which direction the next 100% movement in the markets will be."

There, finally, is a prediction I can endorse.

 

© Copyright 2009, Advisor Perspectives, Inc. All rights reserved.