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The Markets Know What The Analysts And Economists Don’t

Follow the markets signs to gauge its directions

The best economists on the planet regularly hamper the investing community. For example, the National Bureau of Economic Research (NBER) acknowledged in December of 2008 that a recession had started one year earlier (December 2007).

Unfortunately, by December of 2008, the S&P 500 (SPY) had already forfeited close to half of its value (46%).

Similarly, by the time that NBER recognized the existence of the 2001 recession in November of that year, the S&P 500 had shed 29% and the “New Economy” NASDAQ had plunged 65%.

Nevertheless, scores of analysts insist that U.S. stocks cannot fall a bearish 20% or more because the U.S. is not entering a recession. Haven’t these market watchers learned that financial markets themselves are better at forecasting than they are?

And it’s not just equities. Consider the bond market at the start of 2014.

Bloomberg News surveyed the top banks and securities companies on where the 10-year Treasury yield would finish by December 31st. Every economist of the 50-plus in the poll had projected higher 10-year Treasury bond yields (i.e., lower prices on 10-year Treasury bonds).

The average projection? The 10-year yield should move from 3.01% up to 3.41%. Instead, the 10-year dropped to 2.17%.

$TNX 2014

Every single top economist had completely whiffed with respect to the direction of interest rates (10-year yields). What’s more, every analyst who subscribed to the notion that economists are helpful in forecasting the direction of market-based securities missed out on an extraordinary bullish trend in bonds.

Those who went against the herd in contrarian fashion — those who had followed basic technical trendlines and/or understood the fundamental backdrop of Treasury bond supply and demand — profited from an allocation to the long end of the yield curve.

Indeed, one of our largest client holdings in 2014 had been Vanguard Long-Term Bond ETF (BLV) — an asset that outperformed our stock holdings as well as the major benchmarks.

BLV 2014

Are analysts or economists doing any better with their expectations for bond yields in 2015? With the average anticipated move up from 2.17% to 2.75%?

In spite of bond market volatility, the 10-year essentially remains unchanged and I doubt that the same prognosticators are confident in a year-end rate of 2.75% today. Note: For our clients, we did move down the yield curve to reduce volatility. Clients currently hold positions in iShares Barclays 3-7 Year Treasury Bond Fund (IEI) or iShares Barclays 7-10 Year Treasury Bond Fund (IEF).

$TNX 2015

If the information provided by economists and like-minded analysts tend to lead investors astray, why do so many folks listen? I’m not sure that I have an adequate answer for that. My own approach to tactical asset allocation involves a wide range of data — fundamental, technical, economic and historical.

Evidence in the aggregate is what led me to reduce exposure to riskier assets prior to the 2000-2002 tech wreck, 2007-2009 financial collapse, 2011 euro-zone crisis and 2015 sell-off.

As I explained prior to the August-September downturn in “Market Top? 15 Warning Signs:”

“If your asset allocation target is typically 65% stock (e.g., domestic, foreign, large, small, etc.) and 35% bond (e.g, short, long, investment grade, higher yielding, etc.), you might choose to downshift. Perhaps it would be 50% stock (mostly large-cap domestic), 25% income (mostly investment grade) and 25% cash/cash equivalents. Raising the cash level and modifying the type of stock and bond risk will help in a market sell-off as well as offer opportunity to purchase risk assets at better prices in the future.”

In practice, I am neither bearish nor bullish; rather, we have target asset allocations for a “risk-on” environment and we reduce exposure to riskier assets when a wide variety of data set off alarms. The cash that we raised prior to the August-September downturn can be used to acquire beaten-down bargains today or broader market benchmark ETFs tomorrow.

The one thing that I am not particularly interested in? Economist and analyst “group-think.” It fails miserably when it comes to stocks. It fails miserably when it comes to bonds. And it may be equally inept on the currency front.

For instance, how many of these people are insisting that the U.S. greenback can only go up? Meanwhile, PowerShares DB US Dollar Index Bullish (UUP) has fallen below its 200-day moving average and has been declining since mid-March.

In essence, the big move higher in the dollar occurred between July of 2014 and March of 2015; the markets moved dramatically long before analyst-economist “group-think” expressed a belief that the dollar can only move higher.

UUP Nine Months


Don’t get me wrong. I do not anticipate a rapid-fire dollar demise. The global economic slowdown provides support for ownership of U.S. currency, while Fed cautiousness on the pace of rate hikes should keep the dollar from eclipsing the March highs.

Still, it is important to realize that the markets themselves know what analysts and economists do not; that is, market-based securities — stocks, bonds, currencies, commodities — know where they are heading. Economists? Analysts? The media? These groups mislead as often as they succeed.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure StatementETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFsmutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert websiteETF Expert content is created independently of any advertising relationship.

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