The year-end BusinessWeek issue came and as usual it had the survey of what the market will do in the coming year. The following is not a method I invented but it is one I use. The conclusion is mine however. I learned about this during my stint working in Woodside, CA. It lead me to conclude that 2003 would be up a lot (before I started writing so not verifiable unless one of the people I worked with at Morgan Stanley leaves a comment), that 2004 would be up about 15% (slightly too ambitious as the consensus of the survey turned out to be correct) and for 2005 I concluded that we'd be lucky to be up mid single digits (which is sort of correct so far but it was a waffle of sorts).
The idea is to take all of the numbers from the B-week survey, plot them on a bell curve and look for gaps. Then assess which of the gaps makes the most sense. Below is the bell curve;
1120-1139 x
1140-1159 xx
1160-1179 xx
1180-1199
1200-1219
1220-1239 x
1240-1259 x
1260-1279 xx
1280-1299 xxx
1300-1319 xxxxx
1320-1339 xxxxxx
1340-1359 xxxxxxxxxx
1360-1379 xxxxxxxxxxxx
1380-1399 xxxxxxxxxx
1400-1419 xxxxxxxxxxx
1420-1439 xxxx
1440-1459 xxx
1460-1479 x
Barry Ritholtz is an outlier at 880 and Elaine Garzarelli is an outlier at 1635.
Someone who is wildly bullish would probably pick 1500 for the S+P 500 for the end of next year. For months I have been saying that I thought 2006 would be down a little . There is a conspicuous gap between SPX 1180 and 1219. If it were to close next year in that range the loss would be between 3.7% and 6.8%, from 1267 as of 12/16/05. I think those types of numbers are in the ballpark of down a little.
The fundamental reasons behind my down a little idea (repeat for most readers) include slowing earnings growth, economic cycle is about over based on precedent, cyclical bull market is about over based on historical precedent, the yield curve will either invert or the ten year will go up quite a bit in yield (both are a negative so trying to figure which it will be is not too important to me), gold seems to want to go a little higher ( I am saying a little not a lot) which is not a plus for equities, I think there will be less demand for the US dollar. There is one other one that I had forgotten about until recently which is that the second year of the four-year presidential cycle is the worst of the four.
Most of this outlook is based more on how the market usually works types of indicators as opposed to trying to justify why certain current events will add up to a good year.
To be 100% clear, I do not care at all about being right or wrong. My job is to try to let assets grow when the environment is conducive to growth and protect assets when that is the better path. If 2006 does take the SPX up to 1500 I'll be fairly close on either side and that would be great. This goes with not letting ego be more important than client accounts. I can't know if the market will go down, its not going down in any serious way right now so there is no big action take. Hopefully there will not be action to take but my outlook says otherwise.
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7 comments:
Ritholtz at 880?
Where is the link to everyone's
prediction.
I hope you're right. I took a little extra cash and bought leaps :)
If I'm wrong, I won't be down but a few hundred. If I'm right, I get to go out and buy a new tv.
RR,
Don't equities traditionally rally when they sense an end to rate hikes? The logic behind this is that even though earnings momentum is topping out, the prospect of lower rates in the future means corporations will be able to grow earnings....
Picture this for 2006: Rates are falling, oil is stable around $54, the dollar is falling (good for US corps), P/E's are low thanks to the paltry single digit returns in 2005 and the market just shoots up 25-30% in 2006!
I'm willing to bet a steak on 1421; of course, not to hit exactly but closest to the mark. Being "wildly bullish", 1421 gives me a lot of room to be wrong and still win.
Hmmm... kinda looks like a the side view of Homer Simpson.
Roger:
What's the rationale?
Thanks!
Hussman (http://www.hussmanfunds.com/wmc/wmc051219.htm) points out that an ending of Fed rate hikes within the context of relatively high market valuations has historically resulted in market losses over the next year or so (he notes that current market valuations are relatively high). That's assuming there will be an end to the rate hikes, something I do not consider a given. With the 2-year T-note edging above the 3-year note and metals futures driving higher this morning I think I'll take the under for now (but won't mind being wrong).
RW
Flat or down a little makes sense. US valuations aren't that cheap in a long-term context (they look OK relative to the last decade...), profit margins are at elevated levels - there's a risk that earnings growth slows (slower consumer spending, higher input costs - oil products being more of a problem than crude, flat/inverted yield curve making life tough for the financials etc) and we continue to see a grind lower in the PE, perhaps taking years - it's happened before.
US stocks may have had a subdued year, but it's a different story elsewhere. Investors in Europe/UK have had a bumper year in their home markets, our US holdings have done fine thanks to the Dollar, and allocations to Japan/Asia have stormed ahead. the point is that the psychology for investors in these markets will be very different - we have had a great run already, PEs have increased despite strong earnings, and the temptation is there for many to take a few profits and diversify further.
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