NEW YORK From John Paulson’s prediction of a collapse in Europe to Morgan Stanley’s warning that U.S. stocks would decline, Wall Street got little right in its prognosis for the year just ended.
Paulson, who manages $19 billion in hedge funds, said the euro would fall apart and bet against the region’s debt. Morgan Stanley predicted the Standard & Poor’s 500 Index would lose 7 percent, and Credit Suisse Group foresaw wider swings in equity prices.
All proved wrong last year, and investors would have done better listening to Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein, who said the real risk was being too pessimistic.
The ill-timed advice shows that even the largest banks and most successful investors failed to anticipate how government actions would influence markets.
Unprecedented central bank stimulus in the United States and Europe sparked a 16 percent gain in the S&P 500 including dividends, led to a 23 percent drop in the Chicago Board Options Exchange Volatility Index, paid investors in Greek debt 78 percent and gave Treasuries a 2.2 percent return even after Warren Buffett called bonds “dangerous.”
“They paid too much attention to the fear du jour,” Jeffrey Saut, who helps oversee about $350 billion as the chief investment strategist at Raymond James & Associates in St. Petersburg, Fla., said Wednesday. “They were worrying about a dysfunctional government in the U.S. They were worried about the euro quake and the implosion of Greece and Portugal. Instead of looking at what’s going on around them, they were letting these macro events cause fear to creep into the equation.”
The market value of global equities increased by about $6.5 trillion last year as the MSCI All-Country World Index returned 17 percent including dividends. The Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index of government debt returned 4.5 percent.
While Bank of America Merrill Lynch indexes show Treasuries of all maturities returned an average of 2.2 percent last year, including reinvested interest, an investor who bought what was then the benchmark 10-year note – the 2 percent security due in November 2021 – would have gained 4.01 percent after taxes, according to data compiled by Bloomberg.
Money managers who aim to beat markets lagged instead. The Bloomberg Global Aggregate Hedge Fund Index, which tracks average performance in the $2.19 trillion industry, increased 1.6 percent last year through November. More than 65 percent of mutual funds benchmarked to the S&P 500 trailed the gauge in 2012, according to data compiled by Bloomberg.
The 50 stocks in the S&P 500 with the lowest analyst ratings at the end of 2011 posted an average return of 23 percent, outperforming the index by 7 percentage points, the data show.
Blankfein was more prescient. “I tend to be a little more positive than what I’m hearing from other people,” the 58-year- old CEO told Bloomberg Television April 25. “One of the big risks that people have to contemplate is that things go right.”
While markets moved against forecasters last year, their predictions may eventually prove correct.
Ten-year Treasury yields have climbed 0.52 percentage point from a July low to 1.91 percent, while the so-called VIX index of volatility is up 8.3 percent from last year’s nadir.
Greece’s economy will contract 4 percent this year, the International Monetary Fund predicted in October, as euro membership prevents the country from boosting exports with a weaker currency.
The average forecast of 12 strategists tracked by Bloomberg called for the S&P 500 to increase about 7 percent last year to 1,344. It reached 1,426.19, surpassing the year-end prediction by the most since 2003, Bloomberg data show.
Parker said he underestimated the impact of central bank stimulus and investors’ willingness to pay more for stocks. The S&P 500 is valued at 13 times estimated earnings, about 8 percent more expensive than it was a year ago, according to data compiled by Bloomberg.
“We were wrong on our year-end outlook for 2012 mostly because of our view on the multiple,” Parker wrote in a report Oct. 22. “The specter of nearly unlimited intervention from the ECB and the Fed seems to have created a more positive asymmetry than we anticipated.”
One prediction that proved too optimistic was Goldman Sachs’s call on Chinese equities. Helen Zhu, the New York-based bank’s China strategist, said in a Jan. 11 interview on Bloomberg Television that the CSI 300 Index would probably climb 36 percent to 3,200 by year end. Instead, the gauge of shares traded in Shanghai and Shenzhen peaked at 2,717.82 and ended the year up 7.6 percent at 2,522.95.
Zhu, who estimates a CSI 300 index gain of about 9 percent for 2013, wasn’t the only forecaster who proved too bullish last year as government efforts to cool home prices and contain inflation limited equity returns.
About 3,000 recommendations compiled by Bloomberg show analysts overestimated gains for CSI 300 shares by 33 percentage points, the second-most among 45 markets after Russia.