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Year-End Stock Forecasts: Still a Guessing Game


Take a look at the forecasts of Adam Parker of Morgan Stanley and David Kostin of Goldman Sachs.

Still, there is an outside chance that a big bipartisan agreement on how to move forward with debt and deficit reduction plans could spark what would certainly be a gargantuan stock market rally – one that could drive the average P/E multiple for the S&P 500 from its current level of around 13 to well above its historic average of 15.

But even if our politicians pull off this miracle, we may need some more for markets to remain robust. There is Europe to worry about – and a decent portion of S&P 500 companies rely on Europe for a chunk of their corporate profits. And then there's China, where anxiety may have recently given way to some increased confidence that one of the most powerful and fastest-growing economies in the world may not be slowing as dramatically as pundits had feared. The country's purchasing managers index jumped to 50.6, on a scale in which a reading above 50 marks an expansion; new orders are climbing still further. Indeed, Morgan Stanley's Parker is now taking a rosier view of China, suggesting it as a 2013 investment theme.

Forecasting is always a tricky business, but basing an investment strategy on something as unclear as the outlook for the S&P 500 over a full 365-day period strikes me as downright foolish. The ritual of publishing these predictions may be hard for pundits to break, but if you can break the habit of viewing them as a prism through which to evaluate your portfolio and your investment strategy, that would be wise.

Markets simply don't move in annual cycles. Sure, 2008 will go down in history as the year of the financial crisis, but the roots of the drama were sown years earlier and the markets peaked in 2007, for instance. This year it is simply more problematic than ever, given the number of "known unknowns," making predicting 2013 returns as difficult as trying to score a bull's-eye on your dartboard while wearing a blindfold.

I'd suggest that you leave off the blindfold, and put on blinkers instead to shield yourself from the year-end forecasting mania. Focus on the companies in your portfolio, and the risks associated with your low-risk investments. Think about what big surprises might hit in the coming months and how you might prepare for and think about reacting to them. Remember that markets never stand still, and taking their pulse today may give you some insight as to what the short-term risks are, but doesn't tell you much about where they'll be in six or eight months' time.
Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

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Follow The Fiscal Times on Twitter @TheFiscalTimes.
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