Many Happy Returns

The end of the year encourages retrospectives about financial markets.  So let’s match that up with what ‘financial experts’ were saying a year ago.

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!