When half-right market forecasts are disastrous

In many other endeavors outside of investing, getting a forecast half-right isn't quite the end of the world. In asset allocation, however, half-right can be a killer.

Lori Shepler/Reuters/File
The headquarters of investment firm PIMCO in Newport Beach, Calif., last year. According to Brown, PIMCO's incorrect prediction that the stock market would fail to rally back after the recession is still costing investors who took it seriously.

PIMCO got it half-right with its New Normal forecast early in the post-crisis period - they nailed the economic environment we'd be in but completely missed one of the top ten stock market rallies of all time.

Barry Ritholtz has been writing about the Follies of Forecasting since before I was born, see this landmark 2005 piece on the subject at TheStreet.com. By the way, Barry's chutzpah to publish something like that in the pre-blog era - on a site rife with daily predictions - was quite extraordinary at the time.

In many other endeavors outside of investing, getting a forecast half-right isn't quite the end of the world (cloudy with a chance of showers doesn't upset anyone if the clouds arrive without any rain). In asset allocation, however, half-right can be a killer.

Here's John Rekenthaler at Morningstar:

"There was the New Normal argument, as advanced by PIMCO and Bill Gross. The main prediction of the New Normal was economic: The U.S. economy would not roar out of the 2008-09 recession, as is expected during recoveries, but would instead trudge along at only a modest pace. That analysis was spot-on and has earned PIMCO much-deserved credit.

The secondary prediction of the New Normal concerned investments: That stocks would have a lower rate of return in the future, and that stock investors would not automatically succeed by buying on dips. That analysis has been wrong--very wrong. Stocks have had a spectacularly high return since Gross wrote those words, and buying on the few dips has been profitable indeed. In short, 1) the New Normal thesis never directly said that buy-and-hold is dead, and 2) even if it did, nobody should overhaul an investment approach based on the stock-market predictions of a bond economist."

Which was more important to have gotten right? Only an economic theorist or policymaker would say the former, for everyone else with real-world needs and concerns, the miss on the second part of the forecast has been annoying to disastrous, depending on how seriously it was taken by investors.

For those who took it to extremes, the opportunity cost has been tremendous and emotionally exhausting, not to mention all of the over-excited buying and selling and taxation and brokerage commissions larded on in the name of "managing risk".

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to When half-right market forecasts are disastrous
Read this article in
https://www.csmonitor.com/Business/The-Reformed-Broker/2013/0909/When-half-right-market-forecasts-are-disastrous
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe