Welcome to 2007! So how was your 2006? Was it everything you expected it to be? Odds are, things happened to you throughout the past year that you didn’t really expect.
If so, you’d be no different from those people who thought they knew what was going to happen. I’m talking about the financial pundits who get paid to foresee what’s going to happen in the markets and the economy.
Consider the four top fund managers SmartMoney magazine asked in January 2006 to assess where the S&P 500 would end the year. The answers were 1300, 1325, 1400 and 1400; this measure of the large-cap market blew past 1400 in November and finished the year at 1418. If four people who do this for a living can all undershoot the market, could anyone get it right?
Robert Lenzner, the national editor of Forbes magazine, said last December that people shouldn’t expect the dollar to remain weak, “because higher short-term interest rates will keep money flowing into the dollar.” He was right about the short-term interest rates, which rose through pretty much all of 2006, but the dollar continued its downward slide throughout the year.
Another Forbes editor, Lawrence Light, saw good times ahead for onetime superstar fund Fidelity Magellan, which has fallen on relatively hard times since the legendary Peter Lynch left the helm. “The fund will finally get off its hind end under new manager Harry Lange”, Light wrote. But Magellan continued its so-so ways in 2006, bumbling along at eight percentage points behind the S&P 500.
SmartMoney also packaged a batch of predictions at the beginning of 2006, including one claiming that Qualcomm would be “in the sweet spot for the next five to seven years.” But the cell-phone chipmaker opened 2006 at $45 and spent the year in a tailspin with patent-infringement problems, requiring a bit of a rally to finish the year close to 40.
It’s always dangerous to forecast what a single company is going to do. Venture capitalist Paul Kedrosky predicted that Wal-Mart would buy Amazon.com in 2006. It didn’t. Not to be outdone, CNBC gadfly Jim Cramer said last January that he expected GM to declare bankruptcy in 2006, Rupert Murdoch to buy The Wall Street Journal, Comcast to buy CBS and Citigroup to merge with Goldman Sachs. That makes him oh for four on the predictions front.
Of course, if your prediction is bad enough, you can always just make another one. David Lereah, the chief economist of the National Association of Realtors, published a book in 2005 called Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade—and How to Profit from Them . Home values showed very little sign of climbing throughout the year, much less the decade, so when Lereah reissued his book in 2006, it was retitled Why the Real Estate Boom Will Not Bust—and How You Can Profit from It.
There Are No Crystal Balls
The bottom line is, no one knows what exactly is going to happen to the markets or to the economy in the next twelve months. The best we can do is to make plans designed to withstand adversity and craziness, plans that are intended to guide you through decades rather than the hiccups of next year’s stock market.