Windage and Market Forecasts

An accomplished marksman learns to adjust for windage, the influence of the wind in deflecting the course of a bullet. Economic forecasting contains an element of windage.

One must adjust for the pontifications of gasbag pundits and politicians, buffeting generated by the movement of herds and data adjustments for trends, seasonal patterns and other deviations. Often, recent experiences (recency bias) influence investors. This is a human trait reflected in a comment attributed to Woody Allen: “I have seen the future. It is very much like the present, only longer.”

A recurring theme is “the new normal,” a continued slow growth pattern. Estimates of U.S. gross domestic product growth remain tepid, in the 2% range. A Federal Reserve Bank of Philadelphia survey of economists showed forecasts in a tight clump around an average of 2.3% for 2013.

Of course, these projections are not always right. In the Wall Street Journal, writer Justin Lahart urged caution in embracing consensus statistics, noting that another Fed Survey showed that in 23 years of GDP forecasts ending in 2005, median forecasts were off by at least a full percentage point half the time.

Given that nugget, we might surmise 50% odds that GDP for 2013 could range from 1.3% to 3.3%. Speaking to financial planners in Atlanta on Jan. 24, Emin Hajiyev, assistant director of the Economic Forecasting Center at Georgia State University, sees “a growth pause in the cards,” with growth on the lower side of the consensus forecast. “We have a bifurcated economy: somewhat upbeat consumers but a very subdued corporate sector. The debt ceiling rancor doesn’t help.” Kiplinger’s Economic Outlooks see GDP growth for 2013 about the same as 2012 – at 2%.

Hajiyev asks whether 3.5% real GDP growth is possible in 2014? “Yes,” he says, “if we make our down payment on the deficit, the European Central Bank’s bond buying and the U.S. Fed’s attempts work as intended, oil stays at about $90 a barrel, and the Germans write off Greek debt and replenish Spanish banks smilingly.”

How’s it coming? Currently, the market sees trends as friends. Auto sales and residential construction indicators are positive, albeit with a ways to go to eclipse the pre-crash peaks. Labor market data point to recovery, but we need more quality jobs. There are too many low-paying jobs. The Affordable Care Act is prompting firms and institutions to move people to part-time status to avoid health insurance mandates.

In Europe, banks are repaying loans from the ECB early, indicating progress in diffusing the euro zone crisis.

Business has pulled back amidst uncertainty. Investment in tech equipment and software has slowed; durable goods orders are flat-to-down. Big corporate chief executives are concerned about government deficits and increasingly expensive regulations.

Oil prices moved up since mid-November, reaching $97 per barrel last week. Oil over $100 will not aid GDP growth, although Hajiyev expects prices to stay below $100, barring emergencies.

He echoes concerns over U.S. debt management similar to those of ace bond manager Bill Gross. Writes Gross, founder of mutual fund house PIMCO, in a recent investment letter: “Studies by the CBO, IMF and BIS (Bank for International Settlements) ... suggest that we need to cut spending or raise taxes by 11% of GDP over the next 5 to 10 years. Unless we close this gap ... our debt to GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline.”

Equity investors are in a bullish mood since we avoided going over the fiscal cliff. After a run up, a pullback is always possible, but money is flowing from safe assets to stocks. The 10-year Treasury note rate last week topped 2%. Rising rates harm bond prices and could portend higher inflation.

The threat to fixed-income assets and to consumer and investor real incomes is encapsulated in Bill Gross’ observation. Inflation is the ultimate tax, and a favored tool of spendthrift politicians.

Keep your eye on the debt and budget talks in Washington. Adjusting for windage in your investment policy may be called for.


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Lewis Walker, CFP, is president of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) in Norcross, Ga. Securities and certain advisory services offered through The Strategic Financial Alliance Inc. (SFA).  Lewis Walker is a registered representative of SFA, which is otherwise unaffiliated with the Walker Capital Companies. 770-441-2603.
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