I Was Right on the Markets, Wrong on the Economy

11/18/2010 1:55 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

The year started on a high note, with a rallying stock market and clear signs of economic recovery. After the near-death experience of 2008-2009, the worst appeared to be over.

That was the zeitgeist when I made my own predictions for 2010, which I’m reviewing a bit early this year.
As I re-read those columns, two things became clear: I had my best year ever in anticipating the swings of the market, and I was generally too optimistic about the economy.

Since I’m a put-your-best-foot-forward kind of guy, I’ll begin with what I got right.

In “Six Big Predictions for 2010” (January 7th), I focused primarily on the economy, but also touched on the markets.

“There will be a financial mini-crisis or two that re-ignite investors’ fears,” I predicted.

“The sell-offs they trigger would be more like corrections than a second bear market, so for bullish investors they could be buying opportunities.” Right on target.

The most likely victims of such a crisis, I wrote then and in a January 21st follow-up, were “the sovereign debt of the PIGS nations (Portugal, Ireland, Greece, and Spain)—perhaps Italy, too.”

Within weeks, the crisis over Greece’s debt exploded, raising fears of another contagion. But I managed to keep my head while others were losing theirs.
“..The Greek crisis was just a pretext for a long-needed sell-off in markets that had gone ten months without a significant correction,” I wrote on February 11th.

“I have no idea how deep this correction will get,” I concluded. “But based on all the historical evidence I’ve seen, a correction it is, not the end of the rally.”

The Standard & Poor’s 500 index closed at 1,078.47 that day, and the following week, a new rally began, taking it up to 1,217.28 on April 23rd, an 11.4% move.

Just a week before the S&P hit its April highs, I had noted the strength of the rally, but warned: “After such a huge move, there could be a nice correction at hand—maybe the ‘official’ 10% we just missed in January and early February.”

The S&P actually fell 16% to its closing low of 1022.58 on July 2nd, and couldn’t make much headway for the rest of the summer.

The gloom was palpable then, according to several surveys, including our own mid-August MoneyShow.com Investor Sentiment indicator, which “showed the highest bearish ratings we’ve ever seen—far greater than back in February 2009, just before the market bottomed.”

But enough was enough, I wrote on August 5th:

“Looking beyond the next few weeks and into 2011,…the real economic improvement I see, the terrific corporate earnings that ultimately drive stock prices, and the weight of market history tilt the balance to a cautious optimism.”

“..I think it’s worth taking at least a calculated risk.”

On August 26th, I noted a front-page New York Times article whose utter despondency had striking parallels with a famously wrong-headed BusinessWeek cover story from a generation ago.

Within days, Ben Bernanke’s suggestion that the Federal Reserve would open the money spigots again sent stocks rallying 17% to 2010 highs of 1225.85 two weeks ago.

We’ve seen some backsliding since then, amid new worries about Ireland’s finances. This column was ahead of the curve there, too.

“Three big forces behind the recent rise—earnings season, the midterm elections, and the Federal Reserve’s moves to print more money—may come together by early November to drive stocks to a near-term peak, and some profit-taking could follow,” I wrote October 14th.

“…We could be in for some nasty bumps in coming weeks.”

So far, so good there, too, though the jury is still out on the market’s direction from here.

Next: Report card on the economy
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I got some things right about the economy, too. Contrary to prophets of Zimbabwean hyperinflation like Dr. Marc Faber and Peter Schiff, I have consistently downplayed the likelihood of sharply rising prices. (And by the way, when can we expect to hear mea culpas from those charter members of the punditocracy?)

Instead, back in April, I warned, “The greater danger may be the one we’ve been fighting all along: deflation, an outright decline in prices…Chronic unemployment, vast overcapacity, and the inability of banks to lend freely may all keep price increases minimal, if they don’t actually fall.”

That reality of deflation—as opposed to the fantasy of inflation—has shaped Fed policy, especially the latest round of “quantitative easing” (QE2), announced a couple of weeks ago. US core inflation (excluding food and energy prices) rose by 0.6% in October—the smallest increase on record.

I also foresaw the end of the bailout era. “General Motors will complete a public offering this year, helping taxpayers recoup some of the $50 billion the government pumped in to save the struggling auto maker,” I wrote, and Chrysler and AIG would go public again by next year. The second prediction hasn’t occurred yet, but GM’s IPO was a smash hit.

In February, I also spotted an incipient revival in consumer spending, especially among the affluent.

“American consumers are spending again—at least those who have jobs and money in the bank,” I wrote. That’s clearly happened, spreading to middle-income consumers as well.

But enough stalling—here’s the bad news.

In my first “Predictions” column, I wrote: “The economic recovery will be surprisingly strong,” with GDP growth up by 4% or more this year.

“Unemployment will slowly begin to recede, though I expect it to remain above 9% by the end of the year.” Well, at least I got the part about the 9% right; unfortunately, it hasn’t “receded” much at all.

“When there are clear signs employment has begun to improve, the Fed will actually start raising the federal funds rate, most likely in the third quarter,” I said. Actually, employment has been so weak the Fed has had to resort to QE2.

“If the economic scenario I laid out above comes true—and all my other predictions hinge on it,” I wrote, “Democrats will lose seats in the midterm elections, but not their majority.”

Half-right on that, but only several fringe candidates kept the GOP from sweeping the Senate, too. In the House of Representatives, of course, Democrats suffered one of the biggest routs in modern American history.

My mistake, obviously, was being too optimistic on the recovery. By midyear the stimulus had begun to fade, and the lingering problems from the housing bust, financial crash, and a decade of credit-induced euphoria cast long, deep shadows.

Those of you who read this column probably know by now that I tend to be an optimist about the economy and America, although I try hard not to be a Pollyanna. So, if you’re looking for gloom and doom, you should probably go elsewhere.

But I’d rather be rich than right, and all in all, my columns for the year helped you and me move in that direction.

After such a nice run, I’m about due for the market to give me my comeuppance. Anybody who goes into this without humility and a sense of humor will quickly learn their lesson the hard way.

Have a great holiday season and a happy new year.

Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own. This column will be on hiatus, so watch for more information.

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