Barron's Outlook 2009: Should You Trust the Strategists?

by: Keith Robison

It’s that time of year again. The time when market strategists emerge from the beleaguered investment banks to give you their best guesstimate on how high or how low the indexes will be by the end of the New Year. But should we be listening? After all they are all too happy to talk to us about the future while sidestepping the results of their previous year end forecasts in the most recent Outlook 2009 article. In an effort to justify the four foot stack of Barron’s on my living room floor, I intend to review the previous years’ prognostications given by the typical group of esteemed market strategists in Barron’s magazine.

Only five of the market strategists that participated in Barron’s Outlook 2009 participated in the Barron’s Outlook 2007 and the Barron’s Outlook 2008 printed in the corresponding December issues. The five strategists that have participated in each of the Outlooks from the past three years are from Deutsche Bank (NYSE:DB), Citigroup (NYSE:C), JP Morgan (NYSE:JPM), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). We will review the calls of only these five strategists since they are the only strategists with a history to evaluate. We will be looking at their S&P forecasts, sector picks and pans, 10 year treasury rate forecasts and fed fund target rate forecasts.

Let’s start off with their outlook for 2009 (click to enlarge some images):

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On average, these five strategists see the S&P up by more than 19% by year end. Each one is predicting no change in the fed funds rate with the exception of Morgan Stanley, which is targeting a .5% fed funds rate by year end, but there is some disagreement over where the 10 year will trade by year end. Each one is recommending the health care sector and many are shunning industrials and energy.

Let’s take a look at how their forecasts have fared over the past two years.

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The forecasts that were the closest to hitting their marks by year end are shaded in grey. There is not really a clear winner based on the strategists' S&P forecasts over the past two years, but on average Morgan Stanley’s forecast comes closer than the others. One thing that I noticed, which I thought was interesting, yet it was probably just a coincidence, was that the strategist with the worst S&P forecast each year never returns. Tough break.

To judge the sector picks and pans, I assumed that the strategist went long the favored sectors and short the panned sectors. Deutsche Bank hit it out of the park in 2007, which allowed for a 20% average return over the past two years, but Morgan Stanley is the winner when the contest is based on consistent results. When it comes to forecasting interest rates, Goldman Sachs takes the cake, scoring in the top of each category over the past two years.

Judging by the results of the previous Barron’s Outlook articles, I would have to side with the rate forecasts of Goldman and the equity forecasts of Morgan Stanley. Is two years worth of data enough to make a judgment call on? I’ll leave that part up to you, but one thing is clear: none of these five market strategists saw this financial crisis coming at the end of 2007. The average S&P forecast of these five analysts was off by over 46%. With results like that should we expect any one of these strategists to warn us of the danger that lies ahead? Probably not.

Here are some quotes that really drive home just how clueless many of the twelve strategists polled for Outlook 2008 really were:

“…investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears.”

“Recession likely will be avoided, due to the strength in exports and capital spending by corporations and government.” – Abby Joseph Cohen, Goldman Sachs

“Treasuries may hold less appeal next year, the street’s leading strategists say.”

“The strategists note, as well. That bull markets rarely end when the earnings yield on stocks-now around 6%-is higher than benchmark bond yields.”

“S&P 500 earnings are expected to climb 4%, to an average of $92…”

“While some fear this year’s peak profit margins will wane, Bear Stearns’ Jonathan Golub says margins will prove sticky at a high level after years of cost cutting.”

“Profits conceivably could fall as much as 45% if the U.S. slips into a recession. But the stock market likely would fall no more than 10% to 15% from current levels even in this worst case scenario.” – Ian Scott, Lehman Brothers

“Stocks screamingly cheap relative to bonds” – Tobias Levkovich, Citigroup

“While the first half may look like death, second-half earnings will improve as the rate cuts take effect” – Thomas Lee, JP Morgan

“Lee expects the sector (financial) to lead markets higher in 2008…”

“…technology has no direct exposure to housing (buy suggestion).”

“Too much credence, Bianco says, has been given to the “domino theory,” under which a wobbly housing market supposedly knocks down the overspent U.S. consumer, who trips up the Asian export market, which triggers a commodity correction that thwarts infrastructure spending.” – David Bianco, UBS

“The consumer is not dead!” - Tobias Levkovich, Citigroup


  • Kopin Tan, “Outlook 2009”, Barron’s, 22 December 2008
  • Kopin Tan, “Outlook 2008”, Barron’s, 17 December 2007
  • Michael Santoli, “Outlook 2007”, Barron’s 11 December 2006

Disclosure: Author holds a position in SPY