Attempting to invest on the back of economic forecasts is an exercise in extreme folly, even in normal times. Economists are probably the one group who make astrologers look like professionals when it comes to telling the future. Even a cursory glance at Exhibit 4 reveals that economists are simply useless when it comes to forecasting. They have missed every recession in the last four decades! And it isn't just growth that economists can't forecast: it's also inflation, bond yields, and pretty much everything else. If we add greater uncertainty, as reflected by the distribution of the new normal, to the mix, then the difficulty of investing based upon economic forecasts is likely to be squared!For 2011, consensus estimates for economic growth, corporate profits, stock-price targets and interest rates are grouped in an extraordinarily tight range. I have chosen to use Goldman Sachs' forecasts as a proxy for the consensus. Here are Goldman Sachs' principal views of expected economic growth, corporate profits, inflation, interest rates and stock market performance:
- 2011 GDP up 3.4% (global GDP up 4.7%);
- 2011 S&P 500 operating profits of $94 a share;
- year-end S&P 500 price target at 1450 (a gain of about 15%) ;
- 2011 inflation of 0.5%; and
- the 2011 closing yield on the 10-year Treasury note at 3.75%.
"Those who cannot remember the past are condemned to repeat it." -- George SantayanaLooking at history, there was no better example of misplaced optimism than in the period leading up to the Great Decession of 2008-2009, providing a vivid reminder of the poor forecasting ability and investment risks associated with the crowd's baseline expectations and the value of a surprise list that deviates from that consensus.