Editor’s note: This article was first published in April 2013, and is a market snapshot from mid-April 2013: Tom Lee’s S&P 500 targets, gold near $1,500 an ounce, IBEX 35 levels, China’s first-quarter export figures and JPMorgan and Wells Fargo’s results all refer to that week.
2013 will be remembered for the forecasting mistakes made by the market’s most prestigious analysts. People often talk about market efficiency, but it has been shown that the market has more holes than SpongeBob, and trying to predict what might happen is getting downright scary.
JPMorgan analyst Tom Lee is known for his accurate predictions about where the markets are heading, and since 2011 he has been known for his optimism about the S&P 500 and the Dow Jones. At the start of 2013, Tom Lee surprised everyone by changing his forecasts: he went from being a “bull” to saying that the S&P 500 would fall to the 1,400–1,450 area.
In other words, he expected selling to hit the market. So far that hasn’t happened, as the US indices keep setting all-time highs, while Tom Lee himself has changed his tune and is now predicting that the S&P 500 will head for 1,700 points.
What if his long-term prediction wasn’t wrong, and this is just a short-term setback?
Gold has seen the biggest forecasting blunders this year: as we can see, gold could lose the $1,500/ounce level, having entered a spectacular downtrend. Some analysts at Merrill Lynch were saying that, in current market conditions, gold would become the ultimate safe haven and could even reach $5,000 an ounce. It may sound crazy, but Societe Generale was also saying that gold could reach as much as $8,500 an ounce. Other forecasts even talked about $14,000. Right now, it is clear that gold seems to be easy prey for the bears.
I myself wrote that it was time to be bearish on the IBEX 35, the S&P 500, the Dow Jones and China at a time when, as far as the IBEX was concerned, our analysts’ sentiment was completely bullish. A few days after I published that article, many analysts were backing the same prediction, as technical signals appeared that could send the IBEX down to 7,500–7,200 points. A few days later, China released its first-quarter export figures and the markets shot up dizzyingly, with the IBEX 35 rising more than 3%. Now we are hearing again that the IBEX could break 9,000 points, but I still find that hard to see, and while I don’t rule out being wrong, I don’t think it would be the most logical outcome.
At this point we turn to the wise old investors, and a high percentage of them share the same message: with the problems we have right now and those still to come, something doesn’t add up about the bullish sentiment, and sooner or later, when the pieces of the puzzle fall into place, there could be some nasty surprises.
Another crucial week on Wall Street
JPMorgan and Wells Fargo reported results on Friday, and Wall Street was disappointed. These big banks’ results could herald a bad week on Wall Street, since it is now the turn of mid-sized and small banks to report, and they are expected to show weak results; as they come out, the market could react accordingly.
Of course, our colleague Victoria Bernal warns that market sentiment is so extremely irrational that investors could even ignore the bad figures and keep setting new all-time highs, although she also warns that it will probably be hard to ignore the weakness the figures still to come will show, including those for the second quarter.
Victoria also reminds us that the good news on Chinese exports refers to the first quarter, and that the cheer could disappear quickly in the next one. The situation in Europe will still give the markets a few scares, and the US is a mystery, although there is a risk of a bubble because of monetary expansion.
In short, in today’s market, where even prestigious analysts are lost and forced to change their predictions, the advice for individual investors would be to stay on the sidelines for now until they find entry points with more limited risk, and to think exclusively about the long term.
Further reading
Featured image: PLBechly, CC BY-SA 4.0, via Wikimedia Commons.
