Wealth Matters: Forecasting the Year Ahead, and Preparing to Be Wrong

Consider the sustained increase in United States stock prices this year. Many predicted that the Standard & Poor’s 500-stock index would have a good year, but no one predicted it would rise 29 percent.

And already one prediction that every strategist I talked to made for next year is wrong: that the Federal Reserve would curb its bond-buying program in March or later, if the economy remained weak.

On Dec. 18, the Fed announced that it would buy $10 billion less in bonds a month starting in January.

After the announcement, Gary Thayer, chief macro strategist at Wells Fargo, pointed out in a note to clients that the unemployment rate at 7 percent was about one percentage point lower than when the Fed started this round of bond-buying.

Clearly, he and some of the other strategists who watch these things did not think a 7 percent unemployment rate was all that good, but the Fed disagreed.

It’s easy to pick on strategists for what turn out to be miscalculations, but it’s not terribly productive. If clients did not want one-year predictions, Wall Street would probably stop providing them. And the timing, in the case of tapering, may not matter since it signaled that the economy is doing better.

So this year I wanted to do something more than just look at the year ahead and argue the pros and cons of various predictions. After asking what people were predicting, I wanted to know why we still bother with these predictions. If the last decade has taught us anything, it is that unexpected events can knock our portfolios for a loop.

Next week, I’ll look at views on what is likely to happen during the next three to five years and ask why there has not been more of a push for longer predictions.

Up first, the year-ahead game.

CONSENSUS VIEWS The United States stock market has had a remarkable run this year, and the view is that it will continue. But unlike this year, that rise is likely to be more uneven.

Barbara Reinhard, chief investment officer for the Americas at Credit Suisse, said: “Global growth is going to be better in 2014 than 2013.”

In the United States, she said, the drag of the sequester cuts would disappear, and Europe was expected to move into modest growth. Stocks, on a historical basis, are not expensive, and investors have been slow to put money back into equities, so there is reason to think they could continue to go higher.

“This doesn’t mean we aren’t in for some sort of pullback,” she said. “We should experience a 5 to 7 percent pullback at some point.”

Katherine Nixon, chief investment officer at Northern Trust, said an anomaly of this year’s rally was the lack of large dips compared with previous years.

“Investors haven’t experienced a truly volatile market in quite some time,” she said. “Volatility is normal, but we’re riding below normal. So to get us back to normal may feel like a real increase in volatility to people.”

Her concern is that when normal volatility returns in the United States, investors could get spooked.

Next year is also predicted to be one in which Europe may begin to do better, and that means European companies, beyond financial institutions that rebounded broadly this year, are expected to do well.

Ms. Reinhard said her favorite countries were Germany and the peripheral countries that were hit hardest by the recession but have since engaged in structural reforms: Ireland, Italy, Spain and Greece. “Europe is one of our favorite regions in 2014,” she said. “We like it over the U.S.”

Dean Tenerelli, European stock fund manager for T. Rowe Price, said that anyone looking to invest in European companies should have at least a two-year time horizon to weather possible volatility. “Even if things are looking more positive, we’ll still have 1 to 1.5 percent G.D.P. growth in 2014,” he said. “There is still a long way to go before our companies recover to normalized earnings. It’s possible we have a correction next year.”