I normally don’t make outright predictions on this blog, but Sam from Financial Samurai challenged me in his latest blog post. I’m always up for a challenge, so I’ll take a stab at it. Please come and revisit this blog post at the end of 2011. The purpose of the Investor Junkie blog has always been about making good investment decisions. The goal is to help you and I become better investors. Topics discussed in this blog I’ve thought should contain mostly timeless information, and apply regardless of market conditions.
I recommend at least 80% of your equities portfolio should be low cost, tax efficient and indexed based investments. If you feel you can outperform the market, do so with no more than 20% of your assets. When the market zigs one way, you zag the other way. That way if you are wrong, you didn’t bet the farm. Adjustments in your asset allocation strategy also make sense when investing this way. This doesn’t mean 100 equities and 0% bond allocation. This means making adjustments within say your equities and increasing your exposure to emerging markets.
By making smaller calculated bets, that can be somewhat speculative, you might be able to come out ahead. A proper asset allocation in my opinion is the most important thing to ensure investment success. As I have mentioned in the past, any predictions about the future are like football color commentary. While the assessments might be correct, it’s sometimes easier to make predictions when you have no skin in the game.
With all of the disclaimers stated, here is my opinion of what I see happening for the remainder of 2010 and 2011.
- US Bond Market – The ultimate be-all bubble. In the long run, rates can only go higher, but not sure of the time frame. We will not experience the same low rate for 10-15 years like Japan. We don’t have savers like Japan does, and a big portion of our bond investors come from outside of the USA. You are best investing in other alternative investments. Things like Ginnie Mae Bonds, MLPs, dividend stocks (see dividend aristocrats), and preferred stocks. If you do invest in bonds remain on the short end (less than 5 years).
- Unemployment - It will remain structurally higher for a least the next two years. This is because of deleveraging of consumers, business and the government. Tax increases all around, and government intrusion into every aspect of business. This is causing uncertainly by small businesses to hire. States like California cannot keep going at the rate they are going and will need either some sort of Federal bailout, or reduce their workforce. We will not see under 7-8% unemployment during this time.
- GDP – It will remain subdued for the next 2 years at under 3%.
- Inflation – Some sectors are seeing artificial inflation, and growth because of government support. The injected money has to flow somewhere with a 0% FED rate. Hence why you are seeing some disconnect in the stock market with other factors. While it should be higher than the March 2009 lows, it ran up too much, too fast. The S&P 500 P/E Ratio at the moment is 19.53, while not at the 2000 highs is above the average of 16, so the market overall is not cheap but not outrageously overvalued. Only a few weeks ago the P/E was over 22.
- Stock Market – The market for the most part will be sideways (moderately slightly higher) until middle of next year. Volatility will remain increased during this period, so we will have wild swings up and down. The VIX will remain slightly elevated above historical averages.
- Fed Rate – The Federal Reserve does not raise rates at least until after the election and is expected towards the middle of 2011.
- Double Dip Recession – While not 100% ruled out,
it is unlikely based upon the existing growth rate.in my opinion at least 50% chance. - November 2010 Elections – Based upon the tea party movement with the US many people are unhappy with the amount of government intervention. Expect a big change with incumbents in government. Expect a pop in the stock market based upon this news either before (because the results will be obvious) or after the election results.
In my overall opinion we’ll see really crappy growth in most of the economy for the next year and half. My opinions may change over the period of the next year and half, and will revise this page without deleting by striking through the original predictions and listing the revised date. I will post new tweets on my InvestorJunkie account via Twitter.
Readers: What is your opinion with the economy? What do you think will happen?
Putting your money where your mouth is HELL YEAH!
I think we talked about this, but I 100% Agree EVERY Incumbent should be worried!
While I'll openly admit I'm an Independent/Libertarian, this prediction is based upon what I'm seeing in recent election results, now including Kentucky. I also think it will be close, but Obama will win in 2012. IMHO this may change by 2012 elections.
Can I also be the first to say about the traffic light cameras in Nassau County Long Island. The people who agreed to these money making intrusions should be hung out to dry?
Glad you wrote this.
Pls put an exact inflation or 10 year treasury figure. "In the long run, rates can only go higher" is not a very strong argument. Saying the 10-yr yield will reach 4.5% by year end is much clearer.
The stock market, "moderately sideways to higher". Give me a number.
Good job putting figures on the rest.
Where we differ most is in rates. I think rates will be low for a loooong time.
btw, you don't have the official yakezie badge up.
Ok I'll give a percentage from today. No more than 15% higher. It may hit higher than this, but the volatility will not disappear.
I didn't know there was an "official" logo. I'll change it.
"No more than 15% higher" by end of the year? Now that's daring! Why not just say "no more than 50%" higher to make it more fun?
You'll have to read the instructions again from the original Yakezie post. Cheers, Sam
I agree with most of this Investor Junkie, though I wouldn't be at all surprised to see US GDP higher than 3% — barring a crisis — and I wouldn't dare be so precise about how the stock market will move in between!
Neither of you guys can predict the future rates of anything. Sorry. But if either of you end up right, it will be by pure chance alone. Run from people trying to predict this kind of thing (no matter who they are) if they are giving financial advice.
How did you guys suck yourselves into this?
Hi Andrew. I just had a look at your blog, which appears (a) pretty cool and (b) to be full of predictions for all sorts of things.
I fully agree that one can't predict where the market will be in the next 1/3/ or even 10 years (by then you might make a reasonable estimation that it will be 'higher').
However I think one can make a reasonable stab at the fan of possibilities for interest rates or GDP, based on where we are now and the likely outlook. Not a prediction in terms of certainty, but a fuzzy guess.
Anyway, as I say your blog is chock full of prediction. I presume you spend a lot of your day avoiding yourself?
Monevator:
The sort of predictions I was referring to were those that I followed from Sam's blog thread, which led to the interesting contention that followed between IJ and Sam. Interest rate predictions, GDP predictions, as well as short term market predictions aren't, in my opinion, worth getting heated about because I don't believe anyone knows any of this stuff. And I find it interesting what Buffett said about it years ago. He suggested that if somebody whispered to him what the short term rates would be, it wouldn't change a thing that he and Charlie do as investors. Short term speculators would likely change positions, strategically, but over the long run, as an aggregate, long term buy and holders make more than short term traders and movers anyway.
Ah, thanks for the clarification Andrew — we're discussing two threads I guess (and I've only read one!)
Funny thing about GDP rates is this: If you erased my memory of what stock markets have done over the past 20 years, but you sent me back in time with the exact future GDP figures for a variety of countries would be, I would have bet my 1990 money on the countries that were going to post the highest GDP figures from 1990 to 2010 (China, Singapore etc) But I would have been dead wrong assuming that they would have given better total market returns than the aggregate of the slower and average growing GDP countries (including England, Germany, France, Italy etc). So does GDP growth really matter?
Ah well, I've investigated this area a bit and I agree it is interesting. GDP growth does matter, but one problem is the market is very good at anticipating it and bidding up prices. The GDP does follow through but if you paid 20x earnings versus 10x earnings for a slow growing country, your hand is already behind your back. There's also some interesting stuff about how in fast growing emerging countries more of the 'dividend' of growth tends to go on wages and infrastructure etc, or is captured by private enterprise and state legacy industries (however inefficiently).
Also, should have said that Buffett comment above is wonderful. Not sure how I missed it in my Buffettology classes!
Cool post; make sure to revisit (I'm curious where I end up too!)
Bonds – by 2011, yes probably higher rates, but they may very well remain where they are for months. Europe's a mess and people still believe in the good ol' US of A for safetyas strange as it seems.
Unemployment – Right on. College grads can't get real jobs. The jobs lost aren't coming back. The world is changing and Washington doesn't get it. Taxes, protectionism on incessant tinkering are doing nothing to help.
GDP – Will actually hit 3% or more. It's coming off a terrible base and the administration thinks nothing of indiscriminantly printing money. More money in the system makes it easy to artificially boost GDP and equities.
Inflation – We may actually be looking at a deflationary environment. It's tough to say. This is one the economists don't have concensus on – either hyperinflation or deflation, doesn't seem to be much concensus for moderate historical 2-4%.
Fed Funds Rate – They'll raise before that. Odd enough, it's kind of a sign that you've got some balls and the economy's improving (oooh, inflation must be brewing), so it's a race to start raising rates. Australia and Canada are in a pissing match and far be it from the US to be left out.
Double Dip Recession – Probably not, just moderate growth buoyed by fiat currency.
November elections – Things will still suck, but Dems will use things like BP, war and that old "failed Bush policies" to basically blame everything on Republicans and cite the need for MORE government/MORE regulation (since that would have prevented the financial crisis, right? LOL). Anyway, I don't think Dems will get slaughtered like they should, might be marginal changes.
…and now for some of my predictions…
- Growing ire over obscene public worker pensions bankrupting municipalities
- Calls for bailouts of municipalities to forestall bankruptcy (See Harrisburg and much of California on the brink now)
- Outsourcing (contractors) will continue to supplant permanent workers
- Corporate profits may actually continue to improve given unprecedented productivity gains from the recession (they've realized they don't need the workers they per given output)
- Euro will fail. They can't win. If aggressive austerity is implemented, it stunts growth. If not, defaults – the shorts will slaughter them. There's no way out.
Thanks for your predictions… We will see what happens.
Commentators and site visitors. I decided to create a new post, instead of updating this one. Please visit:
2011 Economic Forecast
Enjoy!