In December 2011, a Barron’s panel of ten stock
market strategists and investment managers predicted the S&P 500 index to
end 2012 some 11.5% higher. There was so much for these forecasters to consider – and to
get right. The euro zone crisis, uncertainties over the growth of
earnings, and the U.S. presidential election and ‘fiscal cliff’ were all major
concerns.
Twelve months later, markets are still grappling with many
of the same issues. However, that Barron’s panel forecast, which
the magazine said was ambitious, now looks conservative – the S&P 500 index
was up 16.0% for the year. International market returns were even
stronger, generally speaking.
As usual, there are a few lessons here. First, while
ongoing news headlines can cause people to worry, it’s important to remember
that markets are forward-looking and absorb information very quickly. By
the time you read about it in the newspaper, the markets have usually reacted,
and gone on to worrying about something else.
Second, the economy and the market are different
things. Good or bad economic news is important to stock prices only if
it is different from the information that the market has already priced in.
Third, forecasting the investment market is a challenge for
the best of us. If you are going to invest via forecasts, realize that
not only must you correctly predict what will happen around the globe, but also
correctly predict how markets will react to those events.
Everyone should take an interest in what is happening in the
world, but care needs to be taken in extrapolating the headlines into
investment decisions. It’s far better to let the market do the worrying
for you, and diversify around risks you are willing to take.
In the meantime, many happy returns!
