"Run your profits, cut your losses" ..... there's been a whole lot of cutting going on

With almost another week to go in November, you might think that it's a bit premature for institutions to start broadcasting their predictions for 2018. Nevertheless, it's starting ..... an obligatory annual ritual and a pretty unwelcome one for many of the experts it must be too. Frankly, on balance and for the majority, the track record is poor. So much so in fact that you sometimes wonder why they bother. As much as anything else, it's a marketing exercise of course ..... you've got to get your name out there ; and if your predictions happen to be wrong ..... well, there are always plausible explanations.

Those unfortunate enough to be forced to put their reputations on the line on an annual basis would point out that there's a lot more to managing money than soothsaying market moves from one year-end to the next. They'd be right, of course. Moreover, nobody gets everything right all of the time, and they'd probably also argue that the art of successful trading is epitomised by that old market adage about running profits and cutting losses. Be quick to recognise that the prevailing wind has turned, and to change tack accordingly. (That may be our first ever sailing metaphor ..... and may well be our last !)

Still, it's interesting to be reminded how often the experts get it wrong. It confirms that nobody really KNOWS anything, which might be both reassuring and disturbing at the same time. The WSJ reckons that there are two main lessons to be learnt from the struggles of professional prognosticators. First, that when everybody agrees that prices can only go one way, the alarm bells should start ringing -- something we bang on about quite a lot. And second, that we know a lot less about how the economy works than we thought -- a little humility is always desirable and never more so than when it comes to markets.

In late-2016, the consensus for the year ahead was bullish for the "reflation trade" -- higher bond yields, dollar and stock markets driven by inflationary wage-rises and President Trump's plans for tax cuts and wider fiscal stimulus. Now at the end of 2017, there's been no inflation to speak of, tax cuts are bogged down in Congress, there's been no sign of infrastructure spending plans and most analysts' predictions have proved to be more a source of embarrassment than great marketing tools. 10yr Treasury yields are lower, not higher, the dollar is significantly down and even the market they did get right -- stocks -- is up more than double the most bullish prediction. Good news of course, but even that suggests that the experts didn't have too much of a handle on things.

As usual, the prognosticators will be keen to move on from 2017 and are already knocking out their calls for 2018 -- apparently stock markets will continue to rally and bond yields will finally rise too, though not as aggressively as seemed likely a year ago.

It's easy to see why they might not want people to dwell on their records, and not just for last year. Poor results have been almost as predictable as the predictions themselves : Treasury yields have been slated to rise every year for the last 10 years, and the call has been wrong more often than it's been right. Even when they were correct, only once was the extent of the move anything like the size predicted (2009). The performance has been marginally better on stock markets, but again estimates for the size of moves, if not their direction, has generally been way off.

Another way of answering the question "why do they bother ?" is to say that they wouldn't if they didn't have to. In fairness to all those in the unenviable position of having to make these calls, it is extremely difficult, nigh-on impossible, to consistently and accurately predict market moves over a twelve-month period. And as Eric Lonegan of M&G says in the WSJ, even if you are lucky enough to get it right, it doesn't help you when you're investing. The trouble with this kind of prediction is that there are just too many factors that are ..... well, unpredictable.

Take the year now coming to a close as a prime example : the consensus was that stocks would do well as the Trump administration cut taxes and inflation picked up, and at the same time volatility would rise because of political and geopolitical uncertainty. And what happened ? The consensus was WRONG about taxes and inflation, but stocks went up anyway. It was RIGHT about political and geopolitical uncertainty, but WRONG that it would cause a spike in volatility (the opposite happened).

Looking back, most would say that if they had to pick one factor why so many predictions were wrong for 2017, it would be the issue of inflation -- or rather the mysterious lack of it. Who knows what the great unforeseeable will be in 2018. A change of direction by the Fed perhaps -- Donald Trump still has four new board governors to appoint. You can bet your bottom dollar that they'll be something.

It's important to keep all this in perspective, and only fair to all to do so . Much of the analysis contained in institutions' year-end publications is of very high quality and of great value. It's just the price predictions that you need to take with a shovel full of salt.

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