Monday, December 21, 2009

The Folly of Economic Estimates

The consensus estimate for the year-end value of the S&P 500 index for 2008 was 1,632, which translated into an expected gain of 11.12%. Reality: The S&P 500 index finished down almost 50% in 2008. Oops!
At the start of 2009, 11 Wall Street strategists polled by Bloomberg came up with an average price target of 1,056 for the S&P 500 at the end of the year. This translated into an average estimated gain of 16.9% in 2009. As of 12/18/09, the index was up 24%.
So far, eight strategists have released their 2010 S&P 500 price targets (from the weekly Bloomberg survey), and ALL of them are expecting a gain next year from current levels. Oppenheimer has the highest price target at 1,300, while Credit Suisse has the lowest at 1,125. The average price target is 1,226.25, which implies a gain of 12.53% from here. With 100% forecasting a positive year for the U.S. stock market, you have to ask yourself what the odds are that they will be any where close to correct. My guess-not close, same as in 2008.
Bottom line: You need to build your financial portfolio on the “new normal” principles of investing and NEVER trust estimates of the future from Wall Street and vastly overpaid forecasters. These charlatans are on the same level of fortunetellers and palm readers.

I believe that the dominant focus this coming year will be on capital preservation and income orientation, via bonds, hybrids, and a consistent focus on reliable dividend growth and dividend yield from high quality stocks. The range of outcomes moving forward in the financial markets and the economy appear to be extremely wide at the current time. We will be focusing on maintaining defensive strategies and attempts to minimize volatility
Only by standing against the prevailing winds – selectively, but resolutely – can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.

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