Stock Predictions for 2014

Commentary by Bob McTeer

Source: Forbes

If this must have an economics connection, all I can think of at the moment is the late James Buchannan’s monograph, “Better Than Plowing,” in which his advice to economists wishing to publish was to “keep ass to leather.” Feeling that I should say something profound about the last day of 2013, or the past year, or the next year, that’s where I’ve put mine. So far, it isn’t working.

So, I just went outside for a fresh-air walk around my suburban neighborhood block and encountered a family group (three generations) experiencing the joy of the little ones’ Christmas. They had three new vehicles: a small bike with training wheels, a tiny scooter for a tiny girl, and something Grandpa told me was called a “Green Machine” being driven by Dad on my first lap and little boy on the second. The Dad, less than half my age, could barely fit his body on the green machine; all three generations were delighted when he ran into the curb. The boy was a better fit. The thing about the green machine was that, when you turned the single front wheel, the two back wheels also turned.

Grandpa and I introduced ourselves briefly and I allowed as to how it all looked like much fun. The Mom shook her head and jestered with her cupped hands and two thumbs to indicate that the kids were finally outdoors and not inside playing with their electronic gadgets. I sort of nodded in agreement, although inside I was thinking that those gadgets don’t get enough respect from the older folks. It may not be technically correct to say they make the kids smarter, but at least they teach the kids how to maximize the smarts they have. I’m convinced that’s why our boys make such good fighter pilots.

I’m actually waiting for the Aggies (and Jonny Football) to play Duke tonight at the Georgia Dome in Atlanta. It’s probably neither here nor there, but I was Chancellor of the Aggies for a couple of years following Fed retirement, one of my boys was a “student-athlete” at Duke, and we’re originally from Georgia. That sounds like a set-up for a heartbreak to me. I’ve tried to teach my boys not to let their sense of self-worth depend on whether their teams win or lose, but I know that’s asking a lot. I recall some of the football games that were played the night before FOMC meetings. I certainly felt better about myself when America’s Team had won the night before.

This morning I marveled at how so many guests on CNBC got bent into a pretzel trying to answer questions about what the stock market was going to do in 2014. The answers clustered around, “probably okay, but, of course, not as good as in 2013,” but each had to say it differently than the others. Each needed a hook to make the same seem different.

What gets me is the extent to which everyone on such occasions nods in agreement on propositions that have become accepted wisdom, but which don’t make sense. One of my favorites is the proposition that because the retail stock buyer has been coming back in recently, that’s a sign of danger. Its corollary is that they still aren’t coming back in great numbers, so that’s reason for optimism. I don’t think that anyone today stated what seems obvious to me. New investors coming in with new money are likely to drive prices up, not down. No, everyone wants to be a contrarian—everyone. Get it?

A couple of days ago, a good friend of mine, and a very savvy investor, sent me a copy of a WSJ article that somehow had both sides of the above propositions in the same article, but it seemed to be weighted toward not too many small investors are coming back so that’s a reason for confidence in 2014. He said that made him feel better about 2014. He said it’s when everyone is euphoric that we need to duck. I knew I shouldn’t have done it, but I did it anyway. Instead of simply agreeing, like the other recipient did and staying out of trouble, I replied that I was familiar with that point of view, but I’ve never understood its logic. He said that he’d have to explain it sometime. There went my credibility with him.

When it comes to stock and other types of prognostications on financial TV, there is really no grounding of any of it in economic theory. I recall very well the first day of a class in Business Cycles in university. The professor (full, as I recall) started out by saying there is no such thing as business cycles. He said the economy goes up, and the economy goes down, but it has no built in mechanisms that make it automatic and predictable. There are ups and downs—fluctuations—but no cycle. Another professor did note, however, that “the bigger the boom, the bigger the bust.” But he didn’t say when.

While there is little in economic theory that helps predict the stock market—say it’s not a stock market, but a market for stocks and you’ll garner some approving nods—what people rely on are history and reversion to the mean. It’s taken for granted that history repeats itself—say “at least it rhymes” and you’ll likely get some credit for not being too naïve—so we hear things like the following:

“During the post-war period, whenever a strong year has been followed by an even stronger one and then by a weak one and then an even weaker one, unless it’s leap year, we’re likely to get the same pattern this time around.”

Reversion to the mean is more tempting than history, which for me is just one damn thing after another. Assumed reversion to the mean is presumably behind the sage advice to rebalance at the beginning of the year. How? Well, by selling your winners and buying more of your losers. Say what? Sell those that have been performing well and replace them with poor performers. I’d like to try convincing my mother of that? She might ask me if that applies to friends as well as stocks.

To have reversion to the mean, as I recall, you have to have a boatload of observations. Your sample must approach your universe. That’s a long time to wait. Of course, using the word “mean” on TV rather than “average” marks you as an educated man. I’m waiting for the first brave soul to introduce the “mode”—reversion to the mode. “Yips, it happened again.”

I’m not going there. No reversions to the mode. Not now, and not in 2014.

I wish all of you (or both of you) a very happy new year.