"Run your profits, cut your losses" ..... there's been a whole lot of cutting going on in 2017 ref :- " Wall Street's 2017 Market Predictions : Pathetically Wrong " , STREETWISE in The Wall Street Journal
With almost another week to go in November, you might think that
it's a bit premature for institutions to start broadcasting their predictions
for 2018. Nevertheless, it's starting ..... an obligatory annual ritual and a
pretty unwelcome one for many of the experts it must be too. Frankly, on
balance and for the majority, the track record is poor. So much so in fact that
you sometimes wonder why they bother. As much as anything else, it's a
marketing exercise of course ..... you've got to get your name out there ; and
if your predictions happen to be wrong ..... well, there are always plausible
explanations.
Those unfortunate enough to be forced to put their reputations on
the line on an annual basis would point out that there's a lot more to managing
money than soothsaying market moves from one year-end to the next. They'd be
right, of course. Moreover, nobody gets everything right all of the time,
and they'd probably also argue that the art of successful trading is epitomised
by that old market adage about running profits and cutting losses. Be quick to
recognise that the prevailing wind has turned, and to change tack accordingly.
(That may be our first ever sailing metaphor ..... and may well be our last !)
Still, it's interesting to be reminded how often the experts get
it wrong. It confirms that nobody really KNOWS anything, which might be both
reassuring and disturbing at the same time. The WSJ reckons that there
are two main lessons to be learnt from the struggles of professional
prognosticators. First, that when everybody agrees that prices can only go one
way, the alarm bells should start ringing -- something we bang on
about quite a lot. And second, that we know a lot less about how the economy
works than we thought -- a little humility is always desirable and
never more so than when it comes to markets.
In late-2016, the consensus for the year ahead was bullish for the
"reflation trade" -- higher bond yields, dollar and stock
markets driven by inflationary wage-rises and President Trump's plans for tax
cuts and wider fiscal stimulus. Now at the end of 2017, there's been no
inflation to speak of, tax cuts are bogged down in Congress, there's been no
sign of infrastructure spending plans and most analysts' predictions have
proved to be more a source of embarrassment than great marketing tools. 10yr
Treasury yields are lower, not higher, the dollar is significantly down and
even the market they did get right -- stocks -- is up more
than double the most bullish prediction. Good news of course, but even that
suggests that the experts didn't have too much of a handle on things.
As usual, the prognosticators will be keen to move on from 2017
and are already knocking out their calls for 2018 -- apparently
stock markets will continue to rally and bond yields will finally rise too,
though not as aggressively as seemed likely a year ago.
It's easy to see why they might not want people to dwell on their
records, and not just for last year. Poor results have been almost as
predictable as the predictions themselves : Treasury yields have been slated to
rise every year for the last 10 years, and the call has been wrong more often
than it's been right. Even when they were correct, only once was the extent of
the move anything like the size predicted (2009). The performance has been
marginally better on stock markets, but again estimates for the size of moves,
if not their direction, has generally been way off.
Another way of answering the question "why do they bother
?" is to say that they wouldn't if they didn't have to. In fairness to all
those in the unenviable position of having to make these calls, it is extremely
difficult, nigh-on impossible, to consistently and accurately predict market
moves over a twelve-month period. And as Eric Lonegan of M&G says in
the WSJ, even if you are lucky enough to get it right, it doesn't help
you when you're investing. The trouble with this kind of prediction is that
there are just too many factors that are ..... well, unpredictable.
Take the year now coming to a close as a prime example : the
consensus was that stocks would do well as the Trump administration cut taxes
and inflation picked up, and at the same time volatility would rise because of
political and geopolitical uncertainty. And what happened ? The consensus was
WRONG about taxes and inflation, but stocks went up anyway. It was RIGHT about
political and geopolitical uncertainty, but WRONG that it would cause a spike
in volatility (the opposite happened).
Looking back, most would say that if they had to pick one factor
why so many predictions were wrong for 2017, it would be the issue of
inflation -- or rather the mysterious lack of it. Who knows what
the great unforeseeable will be in 2018. A change of direction by the Fed
perhaps -- Donald Trump still has four new board governors to
appoint. You can bet your bottom dollar that they'll be something.
It's important to keep all this in perspective, and only fair to
all to do so . Much of the analysis contained in institutions' year-end
publications is of very high quality and of great value. It's just the
price predictions that you need to take with a shovel full of salt.
No comments