Almost thirty years ago, I was on a King Air flying from Saint Louis to Jefferson City, Missouri. Our bank, which was doing a lot of bond business at the time, had agreed to fly one of the chief economists from a major Wall Street firm up to the state capital to speak to our state treasurer, and I was one of the escorts. Somewhere along the bumpy and noisy ride, I asked him something along these lines: “So, how exactly do you come up with your economic forecasts, and how do you ensure they are correct?” After a pretty good laugh, he replied, “They don’t pay me to be correct. I set context.” Conversation over.
WHY WE STILL VALUE FORECASTS
When we look at the markets, most of us first think of stocks. After all, to a large extent, the change in the equity side of the market over a year can be seen as a vote on the shape of the economy. And since 2000, there have been only five years in which the stock market has lost over the course of the year. Not a bad track record. And for the forecasters out there, stats like that provide a reasonable starting point for their new market year prognostications. Better than relying on a coin flip, at least in this case anyway.
Discussions of coin flips and market forecasts often remind me of an older publication from the Saint Louis Federal Reserve. In the article, they took the position that a coin flip was just as good as the blue ribbon forecasters at predicting the future direction of interest rates. Turns out they were on to something, as the forecasters only got it right 42% of the time.
So, if forecasts are routinely incorrect, why do we find them so fascinating? It’s all about context; our old friend on the plane really was right. To begin to make decisions about investment strategy or tactics, we need a starting point. Much like deciding to grab a raincoat after checking out the weather report on TV (how archaic), we need a set of thoughts that we can test against our own assumptions to arrive at a set of actions to take.
FOR BETTER OR WORSE, MY 2017 MARKET PROJECTIONS
So, now for the part where I stick out my neck. No two-handed economists here, just forthright conjecture.
Global Equity Markets: After gains early in the year, I’ll ignore my own advice and say that this will be a down year. Not catastrophic, but down.
Interest Rates: Here in the U.S., I think we’ll see the key indicators rise, including maybe the 10 Year at 4% and Fed Funds at 1%.
Currencies: The U.S. dollar will likely remain firm early in the year before beginning what may be another multi-year decline, but not a disaster.
Commodities: It looks like there will be a general firming in prices, especially in energy. Given that: 1) there hasn’t been a major disturbance for some time; and 2) there’s a major disruptor entering the White House, an unexpected geopolitical event could very well occur in 2017.
Real Estate: Ah, the stuff that doesn’t blow away. As I write this, the latest releases show a large decline in housing starts. Still, I think that the market will remain good through the year but lose much of the acceleration we have seen over the past five years.
So, now you have the context to accept or ignore as you set your plans for 2017. I hope you see it as tempered optimism. Of course, I hope that I'm proved wrong as to at least a couple of these.