The crew at Bespoke Investment Group posted the following table with 2011 predictions for the S&P 500 by all (or most) of the big Wall Street firms. Looking at these numbers has some utility at the very least in a contrarian way.With a nod to Ken Fisher this sort of survey tends to get it very wrong and almost always comes to an average of 9-11% expected gain.
From a how markets tend to work standpoint it is difficult to envision that after a two year run for the SPX of 37% (SPX closed at 903 on Dec 31, 2008) that it can go up a lot in 2011 in the manner that some of those folks surveyed think. Obviously the market can do anything for any reason, or no reason, but to paraphrase myself from a couple of years ago--the odds of the market going up a lot after it has gone up a lot are not great.
I also believe down a lot is unlikely because we are so close to down a lot in terms of time (just back to 2008) and the market is still down about 20% from the high. As there are a lot of people in the survey calling for up a little, 5-7%, it would be easy to fade that from a contrarian viewpoint and guess that the market will be down a little. The difficulty there is that the Fed is hellbent on stoking asset prices. Forgetting for a moment the malignancy therein, equity prices are up a couple of percent, give or take, since we learned what QE2 would look like. While that is not a lot, it has not hurt equities and I'm not sure when to expect it to matter--it looks like it matters to the bond market though as yields are up some in that same period.
Circling back to when will this matter, I know that it won't be tomorrow but not sure how soon. I've been working on where in the portfolio to add more foreign exposure at the expense of some domestic exposure. As I've mentioned before things like QE are desperate measures and it makes sense to expect there to be unintended consequences at some point--I think this is only logical based on the last ten years.
An anecdote I have mentioned a few times before; I sat on a panel at a conference a few years ago and one of the other panelists was from Turkey. I asked what a typical allocation to Turkish equities might be for a Turkish investor and he said 15-20%. As time goes on I think the impression this made on me has grown, it was a great lesson about home bias and opens the door to having less and less domestic exposure.This idea, that being more foreign, mattered a lot in the last decade and as I have been saying I believe will matter in the new decade too. Combine that with the desperate measures that are propping up the US economy and equity market and it would be reasonable to want more foreign.
This thesis made sense in the last decade but there were individual years where US equity returns were somewhat competitive. Maybe 2011 will be one of those years again or not, I don't know but I have unyielding faith that foreign will be much better to hold over the decade than domestic and I care far more about that than I do any single year like 2011.
7 comments:
Roger,
Back on 12/18/09 (I think that's the date) you posted some predictions for 2010:
SPX down 10%
EAFE down a touch more
Ten Year Treasury 4%...
Obviously your crystal ball must have had some fire soot on it. If you can't get it right spending all of your time doing this professionally, what hope is there for the rest of us??
None the less, love the blogs and rational thought you put into the markets.
Good post
Of course you are correct about the importance of the long run. But we do not have a normal economy running off of normal economic cycles if governments are going to print ooddles of money.
There will be lots of volatility. Volatility is better when you are at market lows than now IMO.
The money printing is due to lots of bad debts and instability world wide. I am not so sure foreign is wonderful right now.
Its not the long term predictions or next years predictions that are wrong it is just that the path may be a little unexpected.
SEG
retired in prescott, hence the folly of forecasting as Barry Ritholtz refers to it. Over the years I have made quite a few forecasts some right, some wrong--not sure the balance. Given how long you've been a reader here (TY) you may recall my comments about how we navigate through being the obviously important thing. I will continue to get future forecasts wrong as well and they will continue to be far less important than strategy.
hey i was right about EFA lagging anyway LOL
SEG, interesting comments about foreign. Given the heavy weight of Europe and Japan in broad based foreign I would agree in terms of things like EFA, I do believe foreign when chosen more narrowly can outperform.
If you can't get it right spending all of your time doing this professionally, what hope is there for the rest of us??
Successful investing or trading for that matter is NOT about getting 1-year point forecasts correct to 1 decimal point precision. No one can do that consistently, and if someone claims to do so....well..."a fool and his money are soon parted".
Successful investing is about following an extremely disciplined process that delivers some risk premium along with some edge/alpha, and replicated over and over, trade by trade, investment by investment, should deliver solid returns measured over many years.
Roger has graciously shared many elements of his process including "how and when to get defensive", and a ton of ideas for generating alpha at the country level.
No offense, retired, but your question indicates that you don't really understand that it is about process and not crystal ball forecasts.
r-in-prescott:
You lack a "proprietary model".
No doubt we are in for some hard times in the US (when will we suck it up?) but everything is so globally interconnected, correlated, instantaneous, and sell first/ask questions later that when (pick your country) has a small forest fire, the whole world smells smoke and evacuates.
Roger, it's always fascinated me that for a conservative investor (your low personal exposure to equities) that you are so taken with such remote places and themes (fish farms, palm oil plantations, etc). Serves your firm well and is beneficial and educational to your blog readers, just seems at adds with your personal style.
8:39,
This year we saved a little more than we spent from a job I hope to never have to give up so the need for large equity exposure would seem unnecessary. My holdings are not necessarily conservative so much as my asset allocation.
As far as far reaching places, yes I am convinced that my having been early on one or two things has helped our long term track record--from the school of blending together of assets with truly different characteristics.
As some prognostications turn out to be off the mark, so did Bob Feller serve up a few gopher balls that lost him games. Errors should be taken into context of the body of work.
Feller was a part of a stellar pitching rotation for the Tribe.As a team, the Indians still fell short of expectations during his era.Cleveland professional sports must have had some hex attached to them for the past 100 years. The "drive", the "fumble", Browns to Ravens, Mesa blowing the World Series, Lebron's diss...the list is endless.
"Maybe next year...."
T
Post a Comment