I’ve spent roughly the past six weeks reading economic and investment market forecasts produced by strategists in the investing world and from other sources – Goldman Sachs, Credit Suisse, UBS, Morgan Stanley, Cantor Fitzgerald, International Monetary Fund, Bernstein, Strategas, Barclays, JP Morgan, Gluskin Sheff, Deutsche Bank, Societe Generale, Northern Trust, Blackrock, and several others. While the variety of opinion is wide and there is no unanimous consensus on any question, some themes emerged:
• The U.S. economy will recover, but that recovery will be muted at best
• Inflation’s not a problem now, but is virtually guaranteed soon
• The unemployment rate is at or near its peak
• The industrial/manufacturing sector will lead the economy out of recession
• The Fed will begin its “exit strategy” later this year but won’t raise rates substantially until after the mid-term election
• Residential mortgage rate resets will cause another wave of foreclosures and bank failures
• House prices are flattening and are likely to soon improve
• Commercial real estate is a quagmire that will only get worse, at least for awhile
• Taxes will rise in the next couple of years
• China’s economy and market are a bubble waiting to pop
• U.S. stocks are fair to cheap
• Emerging markets will grow faster than the U.S. and therefore deserve a premium valuation
• Both long and short Treasury yields will rise
• Commodity prices will continue to rise
(Note that there are significant differences of opinion about each of these issues, and that some of the items on this list seem contradictory – that’s the hazard of viewing only the “average”).
One of the first things one learns as a nascent investor, whether professionally or personally, is that the markets react not just to information, but to unexpected information. When the consensus expects a certain outcome, the appearance of that outcome is not a market-moving event; the absence of that outcome may be.
While we often disagree with it, we strive to understand the consensus view about the economy, markets and companies. We pay attention to the reaction of the market to the achievement (or lack thereof) of the consensus outcome – for instance, when a company exceeds its earnings target but the stock price doesn’t rise, or when an economic indicator is reported weaker than expected but the market doesn’t decline. Those reactions provide valuable feedback to us about the sentiment in the markets. At the moment, sentiment has shifted from the unabashedly (irrationally, in our view) bullish bent that ruled the latter three-quarters of 2009 to a decidedly skittish one.
Kenn Lamson is a principal at Harmonic Investment Advisors in Boise.