Monday, December 20, 2010

10.2% Prediction for U.S. Market Next Year

Last week someone showed me a USA Today article where they rounded up the usual suspects who weighed in with their 2011 market predictions. I don’t have the article in front of me but the Chief Investment Strategists for Blackrock, Goldman Sachs, and other massive institutional investors fearlessly jumped in with their predictions. What surprised me (I don’t know why this kind of thing should surprise me anymore) was the specificity of the forecasts. Many of them gave their predictions down to the level of tenths of a percent. The more I think of it, if you are willing to go out on a limb and say the Dow Jones Industrial Average is going to gain 10% next year, then why not make it 10.1%? The extra ten basis points makes your forecast more persuasive since it implies greater scientific rigor in coming up with the number. Many of the forecast numbers in the article were exact to the same levels of precision. All I can say is… good for them.

I am at a loss to know what happens at the end of a calendar quarter, and especially at year-end, that compels normally smart and professional investment strategists to behave this way. Surely there is nothing about turning the page on a calendar that has an impact on earnings, margins, employment rates, currencies, and so forth? If there is uncertainty about the future of financial markets, why should it clear up so suddenly for so many analysts at year end, just in time to make their annual forecasts for the next year? I’ve personally never experienced this phenomenon where the month of December suddenly allows for forecasting market performance down to the decimal level, but I want to be clear that I am open to the experience. For the next few weeks I will be making a conscious effort to allow lightening, in the form of scientifically precise knowledge of future events, to strike. If it does, I promise the readers of this blog that you will be the second to know. My associates on the Pinnacle investment team will of course be the first.

Unfortunately, I’m guessing that our forecast for 2011 will evolve during the year, as has our forecasts for all of the previous years we’ve been actively managing portfolios. The main drivers of portfolio performance will be the strength of the US economic recovery, the problems in Europe, and the policy response to outsized growth in China. How these themes will play out during the year is difficult to forecast at the moment. During those times when the forecast is cloudy and the crystal ball isn’t overly clear, we tend to stick to widely diversified portfolios that are invested in a variety of different investment themes. BORING! I guess that’s why I’m unlikely to get a phone call any time soon from USA Today asking for Pinnacle’s 2011 forecast. They wouldn’t appreciate my answer that I’m 47.6% uncertain about the next twelve months of financial market behavior.