Among the most irritating phenomena in the world of finance is the prevalence of “hit and run” predictions. How often do we see an investment guru grab headlines by making an outrageous forecast? The Dow is going to 36,000! Sell everything, a crash is coming! Interest rates and inflation are going to the moon! These predictions serve the news media and the forecasters in that they get attention, if only for a moment. But how often do we see the follow-up story? For example, in January of this year the Royal Bank of Scotland (RBS) caused a sensation with its recommendation to “Sell Everything!”. It forecasted oil falling to $16 and a stock market crisis worse than 2008. Since then the markets have been stable to rising, and oil is about $50. I have yet to see a headline calling out RBS for its bad call, or more important, criticizing the news media for its gullibility in reporting it. Needless to say, there has been no apology from RBS to anyone who acted on its very wrong prediction.
Every year at our Outlook conference we make predictions for the year to come, and we put them in writing. We believe we have an obligation to our clients to report on our accuracy. We do not want to be like the headline-grabbers. What follows is a summary of our major market calls from Outlook 2016, held in October, 2015.
The U.S. Federal Reserve Bank will raise short term rates twice, but will keep rates low. PARTLY CORRECT. The Fed raised rates only once, but rates certainly stayed low.
Longer term interest rates will rise modestly with 10 year bonds yields in Canada and the U.S. remaining below 3.5%. WRONG. In fact, long term rates fell in both Canada and the U.S., with the Canada 10 year bond trading at a record low yield of less than 1.0%.
Investment grade corporate bonds will outperform government bonds. CORRECT. Corporate bond indexes had returns that were about twice those of government bond indexes.
Older distressed preferred shares offer opportunities for yield and price appreciation. CORRECT. Preferred shares have performed well in 2016 with returns over 15%.
The CDN$ should strengthen to the USD .80 level. PARTLY CORRECT. The Canadian dollar did rise from about USD .74 to a high of USD 0.80 in April, before falling off to the mid-70’s at the end of the third quarter.
The Euro should strengthen modestly against the US$. CORRECT. The Euro is up by 3% at the end of third quarter.
Returns for Canadian stocks should be better in 2016 than in 2015. CORRECT. Canadian stocks have had a strong year, with the TSX index returning about 13% to the end of the third quarter.
High quality dividend paying stocks should return 6% to 10%. PARTLY CORRECT. Stocks in this category have returned nearly 12% before dividends to date.
Looking back, we got most of the big calls right, but like many, we did not anticipate interest rates falling from the low levels of a year ago to the lowest levels on record. We are certainly happy (and we think our clients should be too) that we did not sell everything in January in a blind panic. As those who have been with us for a while know, that is just not our style.
By David Baskin
