Regarding economic forecasting, economist John Kenneth Galbraith once said, “There are only two kinds of forecasters — those who don’t know and those who don’t know they don’t know.” Depending on the year, some may suggest that I’m in the second camp.
I take some comfort in what former Dallas Fed President Bob McTeer once told me. He said that most economists aren’t very good at forecasting, but it is expected of them. “So if you’re going to forecast,” he said, “do it often and do it late.”
While a humorous comment, there is certainly an element of truth in it as I take my annual look back at what happened in 2012 and what I think might happen in 2013. You might call it my annual victory lap or slow crawl to the locker room, depending on how I did. It’s all in fun and not to be taken too seriously, but I do try to do the best I can with it.
2012 was another strange year, to say the least. Ironically, it was not as volatile as 2011, with the DJIA trading in a 1,630 point range versus 2,450 points in 2011. From a portfolio management standpoint, less volatility is actually more challenging in terms of getting excess performance. As far as the U.S and global economies are concerned, I don’t think we fixed anything and have mostly sown the seeds for what eventually will be another crisis. Things seem stable now but there is a lot of unfinished business.
The biggest challenge from a forecaster’s perspective is sorting out all the news and trying to determine what is important and what is just noise. This is especially true when looking at the economy and the stock and bond markets. While these are all certainly related and mutually determinant, they don’t always move together or logically. In fact, they seldom do.
Here is what I said in January 2012 and what actually happened:
1. “The European debt crisis continues in and out of the headlines as Europe goes into a recession. Nothing is resolved but they do manage to kick the can down the road a little longer.” True and accurate.
2. “The U.S. economy does not go into recession in 2012 but continues to limp along at a weak 1 to 2 percent GDP growth rate. Global GDP will be the same.” True.
3. “U.S. corporate earnings grow, but fail to beat estimates for the first time in more than three years. S&P 500 earnings per share are forecast at $105 but shrinking P/E multiples will result in a lower stock market by year end.” Only partly true. S&P earnings did not grow appreciably but P/E multiples actually expanded, resulting in a higher market.
4. “The S&P 500 moves up to about 1,370 but probably peaks by April — an increase of 9 percent. Conservative investors may want to be out before that or hedge their portfolios. Aggressive investors may want to short stocks then. Several risk-off events in the second and third quarters will result in a major sell off for 4 to 7 months, taking the S&P 500 down 23 percent from the high to 1,050. As we near election time we will see a relief rally take the market back up, but still finish down about 8 percent for the year at 1,160 on the S&P 500.” Well, I blew that one! The S&P 500 was up 13.41 percent at 1426. I underestimated the Federal Reserve’s determination to continue quantitative easing and all that money had to go somewhere. When will the madness stop?
5. “Interest rates on the 10-year U.S. Treasury bond decline to historic lows of 1.5 percent on the next risk-off event and then head slightly higher by year end.” Mostly true. Rates went as low as 1.3 percent and finished the year at 1.9 percent.
6. “The U.S. dollar continues up and the euro down, with the euro going as low as $1.19 exchange rate. Gold rises at first to $1,750 and then falls into summer. Wait to buy gold at $1,250.” Pretty close on the euro but partly missed on gold. The euro went as low as $1.20 and then recovered to $1.32 by year end. Gold traded between $1,801 and $1,538, closing around $1,650 at year end.
7. “Oil and commodity prices peak sometime this year and start to decline by late in the year, if not sooner, as the global economy slows and demand falls. Oil is at $100 now and could see a spike to $120 at some point. However, the next risk-off trade or a slowing global economy could take it down to $75 by year end.” In between. Oil traded between $109 in March to a low of $80 in June, closing around $95 at year end.
8. “Unemployment remains stuck at the 8 to 9 percent level, then goes up again in late 2012 or 2013. GDP growth of 1 to 2 percent is not enough to make any meaningful dent in the unemployment rate.” Partly true. Unemployment dipped to 7.8 percent but mostly due to more people dropping out of the workforce.
9. “The U.S. government runs another $1.3 trillion deficit.” True.
10. “The presidential election is too close to call.” Aren’t we all just glad it’s over?
So how did I do? I guess I would give myself a B minus on this one. What do you think? Our portfolios had a pretty good year in spite of it, all without taking excess risk.
In two weeks I’ll stick my neck out once again with my predictions for 2013. Maybe I should just heed the words of Mark Twain when he said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true.” Maybe I should, but I just can’t help myself. Thanks for reading.
NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.