Secrets Of Success: A forecast? My lips are sealed
Saturday 02 December 2006
Readers will know my long-standing view that if you are going to make market forecasts, the end of the year is about the worst time to do it, not least because this is when everyone else is being asked to do the same thing. The only thing we know for certain is that a collective market view is bound to be wrong, and a calendar year forecast is among the most dangerous of the year as a result, quite apart from having little intrinsic merit.
A more sensible time to make forecasts, if you have to do them at all, would be in April and October, when the normal six-monthly seasonal market trends kick in.
The last few weeks of the year are a particularly unreliable time to study market behaviour in any case, as the approach of the end of the calendar year is known to be characterised by all manner of unusual goings-on, mostly related to the behaviour of institutional investors. By this time of the year, most fund managers know how good or bad their fund's annual performance (on which their remuneration will be based) is going to look when December 31 comes round.
They would be less than human if they did not work out how this might affect their bonuses. In some cases this might produce a very defensive stance, in order to lock in gains that have already been made. In others, it might have the opposite effect, but the price movements of individual stocks do often show some surprising and not easily interpretable movements as Christmas approaches.
According to the UK Stock Market Almanack, an entertaining collection of market oddities and data published every autumn, December is the third best performing month of the year, after January and April. Most professional investors have become used to adding exposure to equities in December, as it is a short-term bet that, for whatever reason, tends to pay off more often than not. There has been only one December since 1981 when the market has produced a loss of 5 per cent.
This is not to say that such a rare outcome cannot happen again; those with particularly long memories may recall that December 1974 was the stinker to end all stinkers, though the bounceback in January 1975 was strong and immediate and effectively marked the end of the great mid-1970s bear market.
Seven out of 10 times the stock market goes up in December. Of the 20 worst days in the 22-year history of the Footsie index, not one has taken place in the last month of the year.
(For those who like this kind of data, you might also want to note that there are some clear tendencies for stock markets to react in a consistent way to unusually large daily market movements. So, for example, when the market rises or falls by more than 2 per cent in a day, which is rare enough to be sure of attracting front-page headlines, you can be highly confident that there will be a counter-move soon afterwards, though it will typically retrace only part of the initial movement.)
Having noted all the usual caveats about forecasts, my working hypothesis is that the outlook for shares in 2007 is still a positive one. The sharp stock market setback from May to early August was a useful reminder that risk tolerance among investors is still high, bordering on complacent.
In a world that has been flooded by cheap money and excess liquidity, the extraordinarily high prices that are still to be found in the art and London property markets cannot be sustained indefinitely.
However, that does not mean that the stock market cannot continue to advance, now that the mid-year wobble has been firmly put behind us. The change of tack by the Federal Reserve at its August meeting, when it put its two-year programme of interest rate increases on hold, has changed the dynamics of the US stock market in what looks like a decisive turning point.
It is noticeable, as the US fund manager Bill Miller pointed out in a flying visit to London this week, that since then two long-predicted changes in style and regional performance have started to kick in. One is that the US market has started to catch up on other markets that it has tended to lag behind in recent years, and the second is that growth stocks have started to outperform value stocks.
Both these trends are ones that I would be surprised not to see continue. If that view is right, then we might be re-entering a period like the second half of the 1990s, when index funds put in a strong performance and large cap stocks did relatively well. I also continue to have some money on the proposition that some of the sectors that were so badly burned after the 2000 market peak, including several technology and telecoms stocks, and possibly also media stocks, are finally coming round for a relatively strong period of performance.
(Although he is resigned to losing his remarkable record of having beaten the S&P 500 index for 15 successive calendar years this year, Miller is also very bullish about the prospects for equities in 2007. In the absence of unforeseen external shocks, he thinks that the US market has scope to gain at least 15 to 25 per cent in the next phase of the market cycle, sustained by flat or falling bond yields and continued, albeit slowing, earnings growth and continued M&A activity.)
Having been cautious earlier in the year, intuitively, a bullish stance on shares still feels right to me. However, I am not going to break the habits of a lifetime and start to make definitive forecasts until the Christmas and New Year market forecasting season is through, by when we will be able to see where the weight of consensus expectations lies.
The primary use of forecasts continues to be as a contrary indicator. Just look at what has happened to the Japanese stock market this year: most pundits predicted a further good year for the Tokyo market and instead it has been a turkey. The last thing you want when making a prediction is to have everyone else on your side.
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Donald MacInnes: My wasted hours in the retail deserts of Dixons-Carphone
Bargain Hunter: From The Outsider to 1984, catch a cut-price classic, read it in the rye
Money Insider: Smart alternatives to the pensioner bond
Bank-beating exchange rates on your international payments
- 1 Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
- 2 UK weather: Snow to fall in the coming week with sub-zero temperatures to last until early February
- 3 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 4 Warriors in ancient Iraq suffered Post-Traumatic Stress Disorder more than 3,000 years ago, say researchers
- 5 This crazy skiing video will leave you feeling queasy
Nigel Farage: NHS might have to be replaced by private health insurance
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
George Galloway condemns 'racist, Islamophobic, hypocritical rag' Charlie Hebdo at freedom of speech rally
British Muslim school children suffering a backlash of abuse following Paris attacks
Greece elections: Syriza and EU on collision course after election win for left-wing party
iJobs Money & Business
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village