A Lesson in Precision vs. Accuracy
It's that time of year when everyone in my business tries, in earnest, to predict the markets for next year. I've spoken to some of these professionals and my takeaway is that they (still) tend to believe in their prognosticating skills.
In my profession, I’ve come to observe that the more “precise” you are, the more people are apt to find comfort in believing you. People seem to believe if you make very precise statements it must mean you are very confident and therefore it has to be accurate. Unfortunately, in my profession the opposite tends to be true when it comes to forecasting. The more precise the forecast, the more inaccurate the forecast tends to be.
The best example of this in 2011 was Meredith Whitney’s very bold, very precise, and very inaccurate prediction for the municipal bond market made last December 19th, on an episode of 60 Minutes where she said:
“There’s not a doubt in my mind that you will see a spate of municipal bond defaults... You could see 50 sizeable defaults, 50 to 100 sizeable defaults, more. This will amount to hundreds of billions of dollars worth of defaults”
Then later in the same interview in regards to rating agencies and their relationship to the municipal market:
“When individual investors look to people that are supposed to know better, they’re told – they’re patted on the head and told it’s not something you need to worry, about when it will be something to worry about within the next 12 months”
This prediction was heard around the world. She made the cover of magazines, and multiple TV appearances. It appears being precise is better for business than being accurate.
Since her prediction on Dec 19th, 2010 the municipal market has returned 10.5% as of Dec 16th according the Merrill Lynch Municipal Master Index. That beats U.S. Treasuries, stocks, corporate bonds and commodities. The municipal bond market was arguably the best performing asset class of 2011.
In keeping with the parlor trick theme, I will make my stab at outcomes for 2012. Here it goes:
For 2012, I predict the S&P 500 earnings will be $103/share with an earnings multiple of 13. This would make a year-end target of $1,339.00 on the S&P 500, an increase from $1,265.33 which was seen at the close this past Friday, December 23rd.
I see a very nice move in the equity markets in early Q1 driven by continued rebuilding of inventory. Q2 will be a bit tougher as we have continued slack in housing and the peak of foreclosures take hold. The second half of 2012 will be election driven and perhaps a choppy but rising market.
Europe will be the market to watch and certainly those that overweight their portfolio now could be richly rewarded, but I will not be one of them. Even if they solve their currency and debt problems, they still have a culture of leisure that I predict will keep them in recession or near a recession for a longer period of time.
Of course, a European disaster would spell an extreme event of perhaps 25%+ downside. The actual GDP impact would most likely be small, however, I believe the equity markets would react swiftly and forcefully.
Asia (China) growth will slow slightly but much of that appears to have been discounted in 2011 as the Hang Seng Index and the Shanghai composite are down -19.13% and -22.86% year to date respectively. While many might run from Asia, I believe they have taken the brunt of the slowdown.
Ok, those are my best guesses. I like parlor tricks so I played along; however, in the long run I tend to depend on solid allocations with specific tilts to take advantage of opportunities. The predicting is fun and if I'm right I'll be sure to let you know. If I'm wrong and there is a high probability of that, then I will hope you are too busy to notice. After all, this is a core concept for those in the parlor trick business.
Have a happy and safe New Years.
Tim Phillips, CEO – Phillips & Company