Every summer, wealth management firm Cumberland Advisors chief executive, David Kotok, convenes a few dozen of the most successful economists and investors in the deep woods of Maine for fishing, camaraderie and thoughtful discussion. A staple of Camp Kotok is an annual survey that asks participants for their bets on various economic indicators a year hence. About half the group weighs in on such metrics as the U.S. 10-year yield, the value of the S&P 500, the jobless rate, the consumer price index and more. So what did campers predict for the next 12 months at the July 31-Aug. 3 event? The story is the economy is going to go faster, the unemployment rate is going to come down, and the Fed will be closer to raising rates — or will already be raising them, said Stu Hoffman, chief economist with PNC Financial Services and the coordinator of the survey for the past several years. But thats the aggregate overview. IBD sat down with the three top forecasters of 2013s camp to ask their personal predictions for the coming year — and got three very different takes. 2013s No. 1 forecaster was Michael Drury, chief economist at Memphis-based McVean Trading & Investments, which specializes in agriculture futures. Drury is bearish. He thinks the bond markets recent lows have been signalling weakness. I dont think rates are zero because of the Fed, I think its because of the invisible hand, he said. I think were closer to the beginning of the next recession than the start of a takeoff. No. 2 was David Kotok himself. He is most concerned about volatility in the year ahead as the Federal Reserve normalizes after several years of the most dramatic, unconventional monetary policy in history. This is the year of change, Kotok said. For the first time, markets have to say, What happens to this suppressed volatility when central bank policies begin to change and they dont change in a coordinated way? David Berson, chief economist with Nationwide Insurance, was third in 2013s survey. Berson is the most upbeat of the top three — with some caveats. Expansions almost always end because the Fed tightens too hard in response to inflation-caused imbalances in the economy, which arent showing up yet, he said. That suggests to me the expansion can go much farther until we get there. We could go another 4-5 years, Berson said. David Kotok, chief executive at Cumberland Advisors, organizes an annual fishing trip in Maine that brings together a few dozen of the most... David Kotok, chief executive at Cumberland Advisors, organizes an annual fishing trip in Maine that brings together a few dozen of the most... View Enlarged Image Three such differing outlooks on the state of the economy bring three different sets of predictions about economic indicators. Berson sees GDP growth at 3.2% in the coming year, while Drury and Kotok see 2.4% and 2.3%, respectively. The group median is 3%. One indicator that the 2013 survey respondents got wrong was the unemployment rate. It was 7.2% when they met in August 2013, and the group predicted that it would stand at 6.7% a year later. On Friday, the Labor Department said that Julys rate was 6.2%, edging higher from June. Berson and Drury expect the jobless rate to decline to 5.5% by next August, while Kotok and the group median see 5.7%. The group as a whole thinks the S&P 500 index will rise about 4% by July 31, 2015, which would be the smallest such gain since outright declines in 2008 and 2009. Kotok thinks the S&P 500 will be 1977, not far above Tuesdays close at 1920. Berson forecasts 2075. Drury, the long-term bear, sees 2100. There might be one or two more good years in the markets, but there might also be a fairly sizable correction, Drury explained. I think a more conservative portfolio is appropriate. Rather than trying to make a little money in the next two years, you should be girding for the correction and trying to make a lot of money after. Cumberland moved into its largest cash position in a long time in early July, Kotok said. Were in the most dangerous time of year in terms of seasonal flows, along with a Fed policy which for the first time is a negative for financial markets, he said. Many investors, Kotok included, believe that equity markets benefitted handsomely from central banks keeping rates at zero to encourage more risk-taking among investors — and will see declines as the punch bowl is pulled away. Berson isnt a money manager; but as a lifelong housing watcher, he has an optimistic view of that market. The S&P/Case-Shiller home price index will rise 4.1%, he said, less than half of Mays 9.3% yearly advance. A better job market will lead to household formation, he said. Double-digit gains are abnormal and ultimately harmful. Thats because such large spikes pressure affordability and incite speculation in housing investment. Survey coordinator Hoffman said that in recent years the distribution of responses has narrowed quite a bit. In other words, theres more consensus and fewer outliers than in the past. Still, there was some significant disparity: Bets on the 10-year yield ranged from 2.1% to 4.5%. One maverick bet the that S&P 500 would plunge to 800 and another is counting on 5.6% GDP growth. The rosy scenario is we continue a gradual recovery with about 200,000 jobs added per month, rates rise slowly, and inflation is benign, Kotok told IBD. History says it never works that way. Behavior is never at the mean. Its somewhere else.
Posted on: Wed, 13 Aug 2014 01:00:01 +0000
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