Fisher Investments Editorial Staff
Forecasting, Investor Sentiment, US Economy

Onward

By, 12/29/2009
Story Highlights:
  • It's forecast time again! As 2010 closes, economists and analysts are making economic and market predictions for 2010.
  • Today's forecasts are somewhat balanced between bullishness and bearishness, though the bullish calls are only cautiously optimistic, and notions of economic apocalypse are similarly absent from the bears.
  • It's typical during bull markets for forecasters to warily predict near-average or even slightly below average returns.
  • Continued subdued sentiment can bolster the bull going forward as stocks ultimately reflect a better reality.

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Today's mailboxes, inboxes, and airwaves are filled with a deluge of economic and market predictions for 2010—an avalanche stirred by the passing of one year into the next. But will any of these forecasts prove more substantial than the transient snow come spring and beyond? 

First off—ditch the decade forecasts out of hand. Bearish or bullish, if you believe there's anyone in this world who can see 10 years ahead with clarity, we have some swampland in Florida you might be interested in. 

That aside, history shows a spotty record of accurate annual forecasts—more so over time. Thus, we always take forecasts with a grain of salt. But it's worthwhile to see what experts envision for 2010—it provides a gauge of expectations, sheds light on prevailing sentiment, and offers an array of perspectives. As a discounter of what is known and widely believed, stock market moves are ultimately underpinned by reality beating or missing those expectations. 

Today's forecasts are somewhat balanced between bullishness and bearishness—with the vast majority coming in pretty moderate. Of the roughly 115 published forecasts we could find from financial firms, institutions, and agencies, the average year-end S&P 500 price level prediction for 2010 is 1211*—higher (though not by much) than today's index level of 1127. The median forecast was 1215. Of the 15 US GDP forecasts from economists, the average prediction was 3.14% annual growth with a median of 3.23%. Despite the mildly positive consensus, the bullish calls are only cautiously optimistic—though many expect global economic growth to continue, if not accelerate, they remain very wary of risks. 

As these things go, the 2010 view is shaping up to be pretty standard—forecasters are typically tentative and, this year, are all relatively closely clustered together. In contrast, 2009 was unusual in that forecasts ran the gamut from utter ruin to a full recovery in just months. Such dispersion makes sense in a time of high uncertainty and chaos, as was the case last year. 

Here's a random sampling of what some are saying about next year. (Note, the actual number of economic and market forecasts for 2010 are much, much larger than what's represented here—both professional and hobbyist. These are just a selection of some of today's more prominent voices.) 

  • Dean Maki, Barclays Capital chief US economist: "The overall picture for 2010 will be an economy growing rapidly enough to bring down the unemployment rate… We don't believe this time is different from all other business cycles…The consensus view that growth will stay subdued all through next year—there's no parallel to that in modern US history."
  • Michael Harnett & colleagues, Bank of America Merrill Lynch analysts: "The coming months will reveal whether the incipient global recovery is real and investors can begin moving beyond the uncertainties of the recent past or whether the bear market will renew itself thanks to a double dip caused by a policy mistake or some other unforeseen event."
  • Brian Belski, Oppenheimer chief investment strategist: "The widespread skepticism about the US stock market and economy is based more on the unprecedented circumstances of  2007-2009 than on the outlook, which is poised to improve significantly." Additionally, Belski expects the S&P 500 to end 2010 at 1300.
  • Jan Hatzius, Goldman Sachs Group Inc. chief U.S. economist: Estimates the US economy will grow 2.4% in 2010. The economy will be bogged down by employers reluctant to hire and households biased toward higher saving.
  • Mohamed El-Erian, Pacific Investment Management Company (Pimco) chief executive: "We're on a sugar high…It feels good for a while but is unsustainable…" Predicts stocks will drop 10% in three to four weeks to push the S&P 500 below 1,000, the US unemployment rate will stay above or around 8% a year from now, and US GDP will average roughly 2% growth for years to come.
  • Jeffrey Kleintop, LPL Financial chief market strategist: "I think we'll see a solid start, but maybe a challenging second half in 2010… As the extraordinary global policy efforts that created a tailwind in 2009 begin to fade, or even translate into headwinds, it'll be a slowdown for the economy."
  • John Praveen, Prudential Investment Advisers chief investment strategist: "Stock markets were supported in 2009 by the speed of the GDP recovery and breadth of the GDP rebound…During 2010 equity markets are likely to be supported by the sustainability of the GDP recovery and the strength of the earning rebound. Both GDP growth and corporate earnings are likely to surprise on the upside."
  • John Lonski, Moody's Capital Markets Group chief economist: Predicts 2.7% GDP growth for 2010.
  • Bart van Ark, Conference Board chief economist: Forecasts 10.4% average unemployment for 2010, with household purchases rising 1% in 2010: "Even though we do see a pickup in recent quarters, it's not a signal that the consumer is going to lead us out of the recession into solid growth territory."
  • Paul Krugman, Nobel-prize winning economist: "What we've got right now is a recovery that first of all is not showing up very much in jobs yet. It's being driven by fiscal stimulus which is going to fade out in the second half of next year and by inventory bounce…So the things we know about are all going to be negative in the second half of next year. Now the financial markets, the last month, the financial markets have gotten really optimistic. You look at things like the term spread on bond rates. They suggest that the financial markets really think there is going to be a much more vigorous recovery. I don't see where it's supposed to come from, so the range is huge here."
  • Neal Soss, Credit Suisse chief economist: Projects the US economy will grow 3.3% in 2010.
  • Brian Rogers, T. Rowe Price chairman and chief investment officer: Notes companies' balance sheets are "generally are in good shape and we expect to see more capital investment as we head into 2010, and we think that will be a good thing for the markets."

"Caution" is the mood du jour. As early stage bull markets progress, forecasters are generally wary in this way—predicting near-average or even slightly below average returns. Particularly if those forecasters were stung by the last bear market—after all, our expectations for the future tend to be tinged by current sentiment and recent experiences. For gun-shy forecasters, it's a great hedge to say, "I told you I was cautious" (if the market goes down) and "Hey, I was right!" (if the market goes up). 

The Armageddon talk of yesteryear is largely gone, but there's also very little unbridled bullishness. Few foresaw 2009 would be one of the strongest market years in history, and now few predict the trend will continue—which is a nice tailwind to keep today's V-shaped recovery going, as stocks ultimately reflect whether today's cautious stance is warranted or simply melts come sunnier days.

We'll have plenty more to say about 2010's prospects for stocks in the days and weeks ahead. For now, as the world looks back at the year and decade past, today is also a good time to see what consensus is forming for next year. 

*As of 12/28/2009. Data compiled by Fisher Investments Research Staff.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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