Secrets Of Success: A forecast? My lips are sealed

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.

jd@independent-investor.com

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Financial Adviser

    £20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

    SThree: Graduate Recruitment Resourcer

    £20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

    Guru Careers: Application Support Analyst / 1st Line Support

    £25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

    Guru Careers: .NET Developer / Web Developer

    £45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

    Day In a Page

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence