It’s the time of year for crystal ball-gazing – but the kick-off to 2008 in the equity markets has been so brutal that some might already be doubting whether their forecasts were unjustifiably rosy.
Chief among the prediction pundits is Byron Wien of Pequot who has made a January tradition of sharing a list of 10 surprises he thinks the coming year will bring. Marketbeat ran through his calls last week, pointing out that in 2007 Mr Wien got about a third right, a third half-right and a third of his forecasts surprised by simply not being the case.
The list is here in full, but here are Wien’s first two gloomy calls:
1. In spite of Federal Reserve easing, and other policy measures, the United States economy suffers its first recession since 2001 as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent. Federal funds drop below 3%. The unemployment rate moves definitively above 5% and consumer spending is lacklustre.
2. Standard and Poor’s 500 earnings decline year-over-year and the index drops another 10%. Energy and materials stocks hold up relatively well in what is viewed as a correction rather than a bear market. Market conditions start to improve during the summer.
By Friday, Mr Wien was already looking sage. The week had racked up some murky unemployment data and a miserable start to the year for the US indices.
Bespoke Investment Group capped the week noting that after three trading days the S&P had had its 2nd worst start to any year, down 3.86 per cent, the Dow its 4th worst, and the Nasdaq, off 5.57 per cent, its worst ever. But they added, in the five worst starts to the year for the indices, stock markets finished the year in positive territory – which rather chimes with Wien’s call for a summer inflection point.
Another who is keeping the faith based on historical precedent is Citi strategist Tobias Levkovich. In a Monday note, he argues that despite the recent sell-off in markets volatility has not spiked to the extent one might expect.
Despite the sharp decline in indices, he argues, the VIX has not jumped meaningfully this time round implying that such moves are becoming more accepted. (Bespoke also argued here that the uptick in volatility is less dramatic when put in perspective with long term trends).
With the number of stocks trading at or below their 200-days moving averages, Levkovich thinks a relief rally is likely soon.
Perhaps not just yet though. US stocks advanced on Monday as focus turned from the deteriorating economic outlook to the increased likelihood of rate cuts – but the rally didn’t last as indices on both sides of the Atlantic turned lower in mid-afternoon London time.
Levkovich also used January 2nd’s slump as reason to peer back through the historical looking glass. A bad start to the year need not mean tough times across the 12 months, he cautions.
His numbers, right, consider when the year has started with a down day of more than 1 per cent.
Indeed when removing the Great Depression years from the equations, the outcome tends to be quite favourable.
Oh good. Take comfort then in those stats. Excluding the possibility of an absolute unmitigated meltdown, it’s all going to be fine.