Byron Wien’s Ten Surprises of 2008
Dead on target on the first day of the New Year, Byron Wien again published his annual list of surprises to expect in the coming year. Wien, chief investment strategist of Pequot Capital, has been publishing his list of economic, market and political surprises since 1986.
Reviewing Wien’s 2007 list, he got about half of his predictions right.
He foresaw the surge in agricultural prices, the Fed refraining from reducing interest rates in the spring, and Latin America putting in a good performance. He furthermore predicted gold bullion at $800 and oil at $80 – perhaps too conservative but nevertheless in the right ballpark.
Wien was, however, quite wrong with his prediction of a year-end yield of 5.5% for the US 10-year Treasury Note, as the actual figure turned out to be significantly lower at 4.04%.
Although Wien’s prediction of higher stock market volatility, expecting a year-end VIX Index of 20 (compared with the actual value of 22.5) was on target, his other stock market predictions were off the mark. He expected the S&P 500 Index to be 1 600 by the end of 2007 and the Japanese Nikkei 225 Average to gain 15% during the course of the year. Both turned out off the mark – the S&P 500 Index closed the year at 1 468 and the Nikkei declined by 11.1%. Wien also erred with his prediction of S&P 500 earnings growth of 10% – the final number was closer to zero.
Wien believes his ten surprises have at least a 50% chance of occurring at some point during the year. Although this is not a very high probability, his predictions nevertheless make for interesting reading. His list for 2008 is as follows:
In spite of Federal Reserve easing, and other policy measures, the United States economy suffers its first recession since 2001 as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent. Federal funds drop below 3%. The unemployment rate moves definitively above 5% and consumer spending is lackluster.
Standard and Poor’s 500 earnings decline year-over-year and the index drops another 10%. Energy and materials stocks hold up relatively well in what is viewed as a correction rather than a bear market. Market conditions start to improve during the summer.
The dollar strengthens in the first half reaching US$1.35 against the euro and weakens in the second exceeding US$1.50. The European Central Bank begins an accommodative monetary policy. Foreign investors flock in to buy cheap assets in the US early in the year but the dollar declines later as several countries holding large reserves diversify into other assets.
Inflation rises above 5% on the Consumer Price Index as higher commodity prices and oil finally begin to have an impact in spite of modest wage increases. The 10-year US Treasury yield rises to 5%. Stagflation becomes a frequent presidential campaign and Op-Ed discussion topic.
The price of oil goes down early in the year and up later, sinking to US$80 a barrel in the first half as western economies slow and inventories are drawn down, and rising to US$115 in the second. Established wells continue to decline in production while China, India and the Middle East increase their consumption.
Agricultural commodities remain strong. Corn rises to US$6 a bushel and cotton to US$0.85 a pound. Gold reaches US$1 000 an ounce as disillusionment with paper currencies spreads across Asia.
The recession in the United States slows the Chinese economy modestly but its stock market declines sharply. Investors recognize that paying biotechnology stock multiples for highly cyclical companies doesn’t make sense. The Chinese revalue the renminbi by another 10% to control inflation and as a gesture to foreign governments participating in the Olympic Games who complain that Chinese terms of trade are unfair. Several long distance runners refuse to compete in certain Olympic events because of continuing air pollution problems.
The new Russian President Dmitry Medvedev, under the tutelage of Vladimir Putin, becomes more assertive in world affairs. He insists that Russian oil and gas be paid for in rubles and demands a Russian seat at major world conferences. Russia and Brazil stock markets lead the BRICs. The Gulf Cooperation Council markets begin to attract interest among emerging market investors.
Infrastructure improvement becomes an important election theme for both parties and construction and engineering stocks rally in anticipation of huge programs beginning after the new President’s inauguration. Water becomes a critical problem world-wide and desalination stocks soar.
Barack Obama becomes the 44th President in a landslide victory over Mitt Romney. With conditions in Iraq improving, the weak economy becomes the determining issue in voters’ minds. They want to make sure that gridlock ends and Congress gets something done for a change. The Democrats end up with 60 Senate seats and a clear majority in the House of Representatives.
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