So say Douglas Kass of Seabreeze Partners Management Inc., Citigroup Inc.’s Edward L. Morse and Christopher Low of FTN Financial, forecasters whose predictions for equities, energy and bonds proved prescient in 2011. Repeating the feat with their calls for 2012 would require an unprecedented breakdown in price relationships across markets after correlations reached the tightest levels ever.
“They can’t all be right,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $107 billion in client assets, said in a telephone interview on Jan. 5. “Strategists provide a valuable role in the financial community, but flexibility of institutional and individual investors is paramount.”
The diverging views follow a year of near-record volatility in which just two of 12 Wall Street forecasters tracked by Bloomberg came within 60 points of the S&P 500’s close and FTN’s Low was the only economist out of 72 to predict the 10-year yield would slip to 2 percent. Hedge fund managers posted their second-worst return on record and investors pulled money from mutual funds that buy U.S. stocks for a fifth straight year.
Taken together, the outcomes foreseen by Kass and Low would mean a reversal in lockstep moves between the S&P 500 and 10- year yields that have never been greater. Their 30-day correlation coefficient averaged 0.62 in 2011, the highest annual level in Bloomberg data going back to 1962. A coefficient of 1 means assets are moving in unison.
The S&P 500 as of last week had gained 1.6 percent this year to 1,277.81 after reports on hiring, manufacturing and construction spending exceeded economist forecasts, spurring speculation that growth is accelerating in the U.S. Today, the S&P 500 rose 0.1 percent to 1,278.49 at 10 a.m. New York time. The average price for a gallon of gasoline has risen 2.9 percent this year to $3.374, according to the American Automobile Association, while 10-year Treasury yields (USGG10YR) have climbed to 1.97 percent from 1.88 percent.
Kass said in December 2010 that the S&P 500 would end 2011 at 1,257. The benchmark gauge for U.S. equities lost 0.04 point to 1,257.60 last year, the smallest annual change since 1947. Now, he says the index will surpass its March 2000 level of 1,527.46, a 21 percent rally from the end of 2011.
“Europe will morph from a near-fatal affliction to a condition that can be tolerated,” Kass said in a telephone interview on Jan. 4. “The U.S. economy is going to surprise to the upside,” he said. “Stocks are very, very cheap and I haven’t felt like this in a long time.”
Low took the opposite view of Kass on Europe in projecting the yield on benchmark 10-year U.S. notes will hold at 2 percent. The rate peaked at 3.77 percent last year before finishing within a quarter-percentage point of a record low at 1.88 percent, according to Bloomberg Bond Trader prices.
“There still hasn’t been a permanent solution for Europe, there is still lots of uncertainty about the direction of fiscal policy,” Low said in a telephone interview on Jan. 4. “As far as the economic picture goes, so many sectors aren’t contributing.”
Morse, New York-based head of commodities research at Citigroup Global Markets Inc., says gasoline will climb 19 percent to a $4 a gallon because of the closure of refineries in the Northeast U.S. Crude oil this year may head the opposite direction as the dollar strengthens, he said in a Jan. 5 telephone interview.
“We expect at Citi to see continued dollar appreciation against the euro — if not all of 2012, the first half of it, which should have a drag on commodity prices to the degree that other factors like the closure of the Strait of Hormuz won’t stand in the way,” Morse said, referring to the oil tanker shipping route Iran has threatened to close.
Morse predicted in 2011 that Europe’s benchmark Brent crude price would reach a record over its U.S. counterpart. The premium compared with West Texas Intermediate oil grew to the widest level ever $27.88 on Oct. 14.
The S&P 500 ended 2011 about 8.3 percent below the 1,371 average strategist estimate from 12 months earlier, data compiled by Bloomberg show. The gap compares with a 13-year average of 7.2 percent and is the biggest miss since 2008, when the index’s 38 percent retreat left it 45 percent below the mean projection.
“Getting the direction right is hard enough, then getting the absolute level correct is more difficult, particularly if your underlying assumption around volatility changes,” Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, said in a telephone interview on Jan. 5.
Knapp raised his forecast for where the S&P 500 would end 2011 to 1,450 from 1,425 in February before taking that forecast to 1,325 in September and 1,260 in October. The strategist said in June investors should expect a range between 1,250 to 1,350 on the benchmark index until the end of the year.
War, revolution and natural disasters usually can’t be anticipated and require reassessment of the market, Morse said.
“The beginning of the Libyan disruption took place before I left Credit Suisse on Feb. 22, and among the last things I did was revise an oil outlook based on an assumption that this disruption was going to last at least six months,” he said.
Strategists and investors struggled last year to anticipate market moves amid Europe’s sovereign-debt crisis, concerns over the U.S. economic rebound, uprisings in the Middle East and Japan’s March 11 earthquake undermined traditional forecasts.
Dan North, chief U.S. economist at Euler Hermes ACI in Owings Mills, Maryland, predicted the benchmark 10-year Treasury note would rise to 5.5 percent at the start of last year. The estimate was the furthest off in a survey on 51 economists surveyed by Bloomberg.
“There was a lot to deal with,” North said. “Last year, the things that economists would academically call exogenous events — one-time, outside-of-the-economic-sphere things — happened again and again and again.”