Tomorrow’s News, Tomorrow’s Markets

Crystal Ball slim

With 2021 fading into the distance, economists and other market forecasters are peering into the crystal ball to project what might happen in 2022. This is a tough ask. Just how tough can be seen when you look back at what they predicted a year ago.

To be fair, many forecasters were left a little shy of making big calls after the pandemic came along in March 2020. Global equity markets sank 30-40% in the space of a few weeks and then promptly rebounded to reach record highs just six months later. How do you forecast that?

By the end of 2020, some analysts were saying the market had gotten ahead of itself, though the consensus view was for firming growth and rising asset prices on the back of fiscal and monetary stimulus, and increasing vaccination rates.1

But once you dig down into the details of Bloomberg’s survey of more than 500 professional forecasters in the US market, you can really find whatever story suits your view of the world.

For instance, one panelist thought that US equities would underperform the rest of the world. But by 31 December, the Russell 3000 index – a broad measure of the US market – was up more than 25%, or just over twice the returns in other developed markets. Another panelist picked Chinese stocks to be among the leaders. But China struggled amid a government crackdown on multiple industries, with its equity market ending down more than 20%. 

On bonds, a common view was that central banks would successfully keep the yield curve anchored and that inflation, while creeping up, would stay contained. One large bank said: “We expect few inflationary threats in 2021 and expect interest rates to remain low for the foreseeable future”. As we now know, US inflation jumped to a near 40-year high in November to near 7% and central banks accelerated their policy tapering. The bond market, as measured by the Bloomberg Global Aggregate Bond index, posted its first negative year since 1994.

In Australia, the forecasts were also patchy. Each January, the academic website The Conversation assembles a panel of esteemed economists to project economic and market variables for the coming year. The 21-member panel this year included former Treasury, OECD, and Reserve Bank economists alongside financial market and academic experts.2

For 2021, the panel was more upbeat than usual, but even so not upbeat enough. For instance, we were told by the forecasters that Australia’s unemployment rate would likely remain stuck near 6.6% throughout 2021. As it turned out, the jobless rate hit a 13-year low of 4.5% by mid-year, before creeping up above 5% as lockdowns were imposed again.3

On house price growth, the forecasters fell way short. The panel on average picked a 4.9% increase in Sydney prices and a 4.4% gain in Melbourne. By the middle of the year, however, prices in Sydney were already 19.3% higher over 12 months and Melbourne was up 15.0%.

On inflation, the average forecast for the CPI was a rise of 1.6% in the year to December. By the third quarter, however, Australia’s inflation rate had hit a six-year high of 3.0%, above the single highest individual forecast of 2.7% and well above the lowest of 1.0%.

On interest rates, the panel correctly predicted (having been told by the RBA) that cash rates would not shift in 2021. But they over-cooked their currency forecasts – predicting the AUD would end the year around 76.5 US cents. It was just above 70 cents by early December.

For the local share market, the average forecast of the experts for the S&P/ASX 200 index was a modest rise of 3.5% in 2021. But the final gain was nearly four times that. On a total return basis, the Aussie market rose more than 17% for the year! 

For 10-year Australian Government bonds, the view was the yield would end the year around 1.1%. By the end of the year, it was a bit higher than that at around 1.7% and the Reserve Bank of Australia, under market pressure, had abandoned its yield curve targets.

To sum up, the nation’s top economists way undershot their 2021 forecasts for shares, bond yields, unemployment, inflation and house prices, while overshooting their forecasts for the currency. (This is not something you would want to put any money on.)

To be fair to the experts, as well qualified as they are, it’s an extremely tough business making forecasts like this. So many things can throw your assumptions out of whack – a pandemic, a breakdown in supply chains, a trade war, an inflation breakout.

But that really is the point of this exercise and it’s one worth keeping in mind as you are confronted by “lookaheads” in the financial media about what to expect for 2022. At the time of writing, there are any number of themes to fret over, including central bank tapering, inflation, Chinese growth, geopolitical tensions and the ongoing uncertainties over COVID-19.

This is not intended to downplay the real impact of any of those important issues, by the way, but it does serve as a reminder that markets price news instantly. Unless you can forecast tomorrow’s news, it’s unlikely you’ll have any success in forecasting tomorrow’s markets.

Think of it this way: While not as eventful as 2020, the past year has still been full of major news events – the attack on the US Capitol, the resurgence in inflation, the IPCC report and the COP26 summit on climate change, China’s property strains, and the Delta and Omicron variants, to name just a few. Yet equity markets have still delivered solid returns.

The fact is we don’t know what 2022 holds in store. We do know that as an investor, your most reliable tools are diversification, discipline and a financial adviser who knows you, your family and your aspirations, understands what you can live with and builds you a portfolio to maximise the chances of you reaching your goals.

Forecasts will come and forecasts will go. But those truths don’t change.

Contributed by Jim Parker, Vice President Dimensional Fund Advisors

FOOTNOTES

  1. 1‘Here’s (Almost) Everything Wall Street Expects in 2021’, Bloomberg News, 4 Jan 2021
  2. 2‘2021 Economic Survey Points to Brighter Times Ahead’, The Conversation, 31 Jan 2021
  3. 3‘Unemployment Falls Again’, ABC News, 16 Sept 2021
  4. 4‘Residential Property Price Indexes’, Australian Bureau of Statistics, Sept 14 2021

DISCLOSURES

AUSTRALIA and NEW ZEALAND: This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that has been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to au.dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.

 

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