A Market Forecaster’s Report Card

As 2011 came to a close, the usual army of market gurus began making predictions for 2012. I’ve often criticized market forecasters for their embarrassing track records, so this year I made a point of saving a few articles so I could see how accurate their crystal balls would turn out to be.

The first one I bookmarked was called 10 market predictions for 2012—and how to profit from them, in The Globe and Mail. The guru is a portfolio manager for the GMG Defensive Beta Fund, based in New York. Let’s see how accurate his calls turned out to be, and whether you should have acted on them.

1. The S&P 500 will rise by at least 10%.

This probably seemed wildly optimistic a year ago, but it was correct. In fact, the S&P 500 is up about 16% so far in 2012. Unfortunately, the tactical advice was less helpful: “If you have a lot of conviction this prediction will come true, you might consider buying the Russell 1000 High Beta ETF. If you think the election will work its magic, but that the patient still has a bad case of anemia, you might consider buying the Russell 1000 Low Volatility ETF.”

Alas, Russell closed both these ETFs in August. Had you owned them in a non-registered account when they were liquidated, you might have been stuck with a nice taxable gain.

2. Greece will begin official negotiations to exit the euro.

The article predicted Greece would leave the eurozone in a “structured and orderly fashion,” and that it would “reintroduce the drachma alongside the euro for a three-year time frame.”  Talks regarding Greece’s departure from the eurozone did take place in November, but it looks like the country is staying put. About a week ago, Standard & Poor’s said the likelihood of Greek exiting the euro is one in three.

The advice for profiting from this prediction was to “underweight international and emerging market exposure.” Both the MSCI Europe and MSCI Emerging Markets indexes are up about 14% year-to-date.

3. President Obama wins re-election.

This one had a probability of 50%, and it was right. Our forecaster did not offer any advice about how one might have profit from calling the coin flip correctly, though the consensus seemed to be that an Obama win would be bad for stocks. U.S. markets are up slightly since the November 6 election.

4. China will allow the renminbi (yuan) to rise nearly 8 percent against the dollar.

Nope. The renminbi was down for the first three quarters of the year, and only a recent surge has resulted in any increase at all. As of December 19, the Chinese currency had gained less than 1.5% against the US dollar.

5. The commodity bull run resumes in 2012.

“Investors can play this by investing in global agricultural stocks,” the article says. “We are long Monsanto, but Deere, Caterpillar, and the PowerShares DB Agriculture Fund, none of which we own, are also viable candidates. To play the metals side of a surge in commodities, investors can look at PowerShares DB Base Metals Fund.”

Monsanto is up about 30% on the year, but that was the only good call here. Deere and Co. is up about 11% and Caterpillar is flat in a year where US large-caps have gained about 16%. Meanwhile the PowerShares DB Agriculture Fund is negative so far in 2012, and the PowerShares DB Base Metals Fund is up just 3%.

6. Europe will spend most of the year in a recession.

In November, economists declared Europe was indeed in a recession. “Based on these expectations,” our forecaster wrote, “I would recommend underweighting European equities.” As we’ve seen, the MSCI Europe Index is up about 14% year-to-date.

7. The United States will avert recession, with GDP growth below 2 percent.

The US did manage to stay out of recession, but its GDP growth in 2012 was higher than predicted: it increased 2.7% in the third quarter. It’s not clear how anyone could have profited from this call, even if it was accurate.

8. The 10-Year Treasury bill yield will move towards 3%.

Predictions about rising interest rates have been almost universal for more than three years. They have also been resoundingly inaccurate. As of December 19, the yield on 10-year US Treasuries was 1.89%.

9. Brazil’s stock market is going to be one of the best performers in 2012.

Markets around the world surprised everyone with their double-digit returns in 2012—except in Latin America’s largest economy. The MSCI Brazil Index is down more than 3% year-to-date.

10. Another shoe will drop and undermine investor confidence.

This prediction called for a financial scandal like the MF Global collapse of 2011. We certainly saw one of those in July, when the Libor scandal came to light. Barely a week later, a trading glitch at Knight Capital temporarily buggered up the pricing of a number of ETFs. Just this month HSBC was fined for helping drug lords launder money. So this was an accurate call, but it was about as brave—and as useful—as predicting heavy traffic during rush hour.

Did these predictions help you?

So, if you were looking to reposition your portfolio at the beginning of 2012, how useful would these predictions have been?

A few were broadly accurate (US stocks would perform well, there would a financial scandal), but could you have profited from them? Only if you also avoided the ones that were unequivocally wrong (Europe, the Chinese currency, commodities, rising rates, Brazil). Overall, an investor with a broadly diversified portfolio would have been better off ignoring each and every one of these predictions. Quelle surprise.

I have two predictions of my own for 2013. The first is market gurus will again make terrible forecasts and suggest tactical moves that will turn out to be harmful. The second is investors and the media will continue to lap them up while they criticize index investors for “doing nothing.”