A 2011
review of market outcomes and the “experts” who failed to predict them.
“Prediction is very difficult, especially if
it's about the future.” - Niels Bohr, Danish physicist
Entering 2011, many investors had great hope in the
world economic recovery. Equity markets
had just tallied two straight years of strong performance, central banks
remained committed to low rates, and major developed countries were working to
resolve debt issues. As would be
expected, pundits were out in full force predicting another great year for
stock investors. A survey conducted by CNNMoney of 32 “experts” found the average
prediction for the 2011 S&P 500 return was 11%. In fact, not one of the experts thought the
S&P 500 would decline.[1] How accurate were they? The
S&P 500 ended exactly flat in price at yearend and eked out a 2.11% return
with reinvested dividends.
Even with such optimism in the air, the market Bears were not to be
outdone for 2011 predictions. Perhaps most notably was Meredith Whitney’s call
of the Muni Bond collapse. For 2011 she predicted “hundreds of
billions” of municipal bond defaults.
The prediction actually induced a short term sell off in the muni bond
market, but ultimately she was shown to be spectacularly wrong and municipal
bonds finished off the year as one of the best performing asset classes with a
return of 11.2%.
By mid-year, however, optimism faded as troubling events around the world
dominated headlines. The devastating earthquake and tsunami in Japan, political
unrest in the Middle East, rising oil prices, a US credit downgrade, the threat
of another global recession, and an escalating debt crisis in Europe weighed
heavily on markets. As stock market volatility returned to global financial
crisis levels, investors faced a major test to their discipline and staying
power. The sanguine predictions from
January 2011 were soon long forgotten and the Bulls pulled in their horns. However; the doomsday economists were happy
to fill the void. The ECRI (Economic
Cycle Research Institute) touts their record of calling market turns and will
give you access to their data, for a small fee of course. In September this year they issued a report
which stated:
“Early last week, ECRI notified clients that the U.S. economy is indeed
tipping into a new recession. And there’s nothing that policy makers can do to
head it off.”[2]
It appears for the time being they missed the boat on the US economy,
which showed surprising strength in the fourth quarter despite the Euro Zone
crisis. And finally, there was Gold. The world exploded with talk of the yellow
metal this year following its historic rise which began in late 2007. The “End of America” was imminent and only
gold would save us. Numbers such as
$2,000, $3,000, and even $5,000 per ounce were being thrown in the whirl wind
of projections and no estimate felt too high.
JP Morgan’s pick: $2,500/oz by the end of the year.[3] With all the hype many of us began to
ask: “If Gold is going to be so
valuable, why are they trying to sell it to me so badly?” The question was partially answered when the
Alluring Aurum ended December at $1,531/oz, or 23% off its 2011 high. Gold has had a spectacular rise, but the
1980’s taught us the fall can be just as impressive.
These
illustrations are not meant to prove the economy is guaranteed to blossom in
2012 or that there will be continued wilting.
What you can take away as you
review the market events from 2011 and look towards 2012 is that two things did happen exactly as expected. First, history has shown that “expert”
predictions are almost never accurate, 2011 was no exception. Secondly, markets last year were consistently
capricious affirming that a globally diversified asset allocation portfolio is
still the best way to build long term wealth.
[1] Stock
outlook for 2011: Recovery rally will continue – CNNMoney
[2] http://www.businesscycle.com/reports_indexes/reportsummarydetails/1091
[3]
http://online.wsj.com/article/BT-CO-20110808-713367.html
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