It’s that time again. With the end of the year looming and a new one about to begin, the crystal balls are getting a workout as media and market prognosticators publish their considered forecasts for 2009.

These “year-enders” are usually cooked up by editors ahead of time to fill gaps in the news schedule over the holiday season. Usually what happens is that a harried journalist, up against deadline, calls all the “usual suspects” to coax a quote out of them about next year’s outlook.

(By the way, the trick in agreeing to these interview requests is to keep your forecasts vague or open-ended enough not to come back and bite you at a later stage. So, merely making sage references to “managing uncertainty”, “negotiating volatility”, “juggling policy dilemmas” or “keeping an eye out for geopolitical wildcards” can be enough to make you look like Nostradamus.)

Occasionally, though, the gurus make the mistake of putting actual flesh onto their forecasts. For them, that can be embarrassing should anyone reflect on their calls a year later. For the rest of us, it can be a reminder about how hard it is, even for the supposedly smartest people, to reliably forecast the future.

Looking back now on the forecasts made for the markets at the beginning of 2008, it’s fair to conclude that the overwhelming bulk of them turned out to be a little on the, err, optimistic side.

For sure, there was talk of recession. But plenty of people were saying the pessimism was overdone, that the newly emerging economies of China and India had “decoupled” from the US, that commodities would provide a reliable diversifier and that inflation from soaring oil prices was the biggest threat.¹

As it turns out, the world ends 2008 with more talk of deflation than inflation², with growth in the world’s new powerhouse China reported to be slowing sharply³ and with talk of a commodities “super cycle”, so prevalent only a few months ago, now almost entirely absent.

But it wasn’t just commodities that the forecasters got wrong this year. In January, The Wall Street Journal was telling us that investors had grown weary of “pricey” bonds⁴. Back then, the US 10-year Treasury was yielding around 3.7 per cent. Nearly a year later, the yield has fallen by another percentage point. So what are they thinking now? (Yields fall as prices rise).

And where do we begin with the equity market calls made a year ago? At the end of 2007, New York newspaper Newsday sampled “eight major Wall Street Securities firms” and came out with an average price target for the S&P-500 by year-end 2008 of 1,653, representing a 12 per cent rise on the previous year.⁵ As of mid-December, those analysts were about 80 per cent off the mark (which may partly explain why most of their firms no longer exist).

But it wasn’t just US newspapers publishing what turned out to be wildly inaccurate forecasts. Across the Atlantic, The Times’ associate editor and economic commentator Anatole Kaletsky told his readers in January that the “global credit crisis is now almost over, there will be no US recession (and) stock markets around the world will rise in 2008″.⁶ To be fair, Kaletsky did add a few caveats, but these were buried deep in the article.

In the Australian financial media, the advice was that while the market would remain volatile, this was a stock pickers’ paradise. One ubiquitous commentator told us that Australian resource stocks were a safe haven from the global carnage and that BHP Billiton, the world’s biggest diversified miner, was “safe buying” at $33.⁷ (BHP got down to $20 by late November.)

Of course, one could have bypassed the media and gone straight to the recommendations of the stock analysts. This way, you might have avoided adding to your portfolio the likes of Allco Finance Group, ABC Learning Centres and Babcock & Brown, three of the worst performers on the Australian market in 2008. But then again, maybe not, because all those now trashed companies a year ago were rated as “buys” by most of the equity analysts tracked by Bloomberg.⁸

Even many of the people who were bearish at the beginning of the year turned out to be worrying about the wrong things-rising inflation, tighter monetary policy and steadily increasing oil prices, for instance.

The point of all this is not to paint a gloomy picture for the markets in 2009, but to demonstrate, yet again, how hard it is to accurately forecast (at least with any consistency) financial market outcomes.

At the start of 2003, for instance, with the Iraq war looming and the SARS virus appearing in Asia, commentators were overwhelmingly downbeat about market prospects. Yet that turned out to be one of the best years for risk assets in some time.

The fact is no matter how credentialed these commentators are, no matter how many degrees they hold, they are still, after all, only guessing. When they do get it right, it’s usually because they got lucky.

It’s something to keep in mind when you trawl through the special editions, year-end wraparounds and ‘Outlook 2009′ covers in the coming weeks. Read this stuff by all means, but you’re best to view it in the same light as your annual horoscope.

Experience, after all, tells us that prophets and profits don’t mix.

²‘Investors are Expecting a Lot of Deflation’, BusinessWeek, Dec 9, 2008

³‘China’s Imports, Exports Fall as Economy Hits Wall’, Reuters, Dec 10, 2008

⁴‘Bond-Wear Investors Behind Stocks Rise’, Wall Street Journal, Jan 25, 2008

⁵’2008 Outlook for Investors’, Newsday, Dec 31, 2007

⁶‘The Worst is Over for the Global Credit Crunch’, Anatole Kaletsky, The Times, Jan 14, 2008

⁷‘Stock, Look, Listen: Signals to Show Way’, The Sydney Morning Herald, Jan 30, 2008

⁸”Buy’ Calls Turn Sour as Allco, Babcock Prove Analysts Wrong’, Bloomberg, Dec 9, 2008

Tags: investment, investment philosophy