Stock Forecasts Go To Extremes

Share this article

Hearing former Merrill Lynch technical analyst Charles Nenner forecast Dow 5,000 on Bloomberg TV today made me reflect on some of the more dramatic price calls in recent years.  Nenner has a wide institutional following, and this isn’t his first prediction of 5000.  In 2010 and 2011, his cycle work led him to expect the precipitous decline to 5000 by 2013.  He now expects that decline to begin in 2013 and continue to a bottom in 2017 or 2018.

Famed bond analyst Bill Gross made headlines years ago when he stepped into the equity arena and voiced his similar expectation of the Dow dropping to 5000.  Bob Prechter has gone him several better by pointing to an undated 1000 target.

Striking as those forecasts are in a negative direction, exuberant bulls are even more prevalent.  (Bullishness sells better.)  A few months ago, Thomas Lee, J.P. Morgan Chief U.S. Equity Strategist, opined that the Dow would hit 20,000 within four years–not an extreme outlook by historic standards.  Widely read commentator James Altucher recently predicted reaching a more aggressive 20,000 goal in a mere 12 to 18 months.  Of course, extreme predictions are nothing new.  In 1999, just before the bust, James Glassman and Kevin Hassett sold lots of books by forecasting Dow 36,000.  In 2010, Forbes upped the ante by profiling the work of an unnamed analyst who anticipated Dow 50,000.

Warren Buffett was interviewed for three hours this morning on CNBC.  In a wide-ranging discussion he voiced his regular theme that he is not a short-term market forecaster.  He has built Berkshire Hathaway over the years by persistently pursuing value and by buying companies that appear to have a durable competitive advantage.  While Berkshire has achieved an outstanding long-term record, Buffett reminded viewers that its stock price has been cut in half four times over the decades.  He retains his long-term bullish outlook for the American economy and stock market.

Any number of outcomes remain possible for U.S. and foreign economies and markets in the years ahead.  The upcoming decade or two could look like most of their recent predecessors.  On the other hand, they might not.  Domestic and world debt levels have risen to unprecedented heights and are still being boosted aggressively by a coordinated round of loose money and fiscal stimulus.  This Time Is Different, Reinhart and Rogoff’s comprehensive study of 800 years of financial crises, warns that such overwhelming rescue efforts typically end badly.  Nonetheless, Buffett and most others remain bullish.  We have long counseled that stock prices can continue to rise as long as confidence remains firm that central bankers will be able to counteract weak underlying fundamentals.  We have simultaneously warned, however, that such confidence can fade quickly and that years of gains can be erased quickly when confidence is lost.  Investors should weigh carefully current unique conditions when deciding on what percentage of assets to expose to equity risk.

In our last two quarterly commentaries and in other recent writings, I have discussed alternative investment processes that we have researched over the past two years.  These approaches are designed to evaluate short-to intermediate-term conditions in an environment in which the Fed has negated the effectiveness of many traditional analytic tools.  Since October, we have offered an alternative equity selection process which we have back-tested for 32 years.  It has historically outperformed the S&P 500 over that time while suffering fewer and smaller annual and quarterly declines.  For those desiring increased equity exposure, we are pleased to provide additional details.