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Wall Street Gurus Miss Again On Sector Predictions

What’s the one thing most Wall Street analysts’ annual market predictions have in common?  They’re almost invariably wrong.  Yet many investors continue to follow these gurus year after year in hopes of gaining an investing edge.

The year 2012 was no different, according to economist Fritz Meyer, who has been tracking Wall Street predictions since 2005.  “The top analysts have failed to add any return over that time,” Meyer says in a blunt assessment.  “There is not one year in which, on balance, the strategists did well.  They have consistently fallen far short of being able to beat the Standard & Poor’s 500 with their sector calls.”  In fact, Meyer asserts, investors might prosper by taking a contrarian view.  “If you bet against the consensus every year you probably will come out well.”

The lesson is to stick with modern portfolio theory (MPT), which dictates diversification and periodic rebalancing of your portfolio based on your goals and risk tolerance.  Some investors believe the 2008 financial crisis dealt a blow to MPT, but Meyer says the opposite is true:  Investors who continued to diversify and rebalance their portfolios had comparatively good results.

He adds that “tactical asset allocation,” often offered as an alternative to MPT, is based on the premise that you can guess which sectors are going to outperform, and shift your holdings accordingly.  “It gained a lot of currency after the bear market, when a lot of people concluded that modern portfolio theory was dead,” Meyer says.  “That wasn’t true. Had you followed MPT you would have come out the other end smelling like a rose.”  The problem, he says, is that investors failed to diversify and rebalance their portfolios as the crisis unfolded.

Each year, Meyer looks at the Barron’s Forecast, which includes sector picks from 10 top Wall Street analysts.  Their predictions for 2012, published in Barron’s in December 2011, followed the usual pattern, with most turning out to be wrong or very wrong.  (See accompanying table.)

The gurus’ worst call was in financials.  Six analysts predicted financial stocks would underperform the S&P 500, while just one thought they would do better than the index.  In fact, financials returned a whopping 26%, almost double the 13.4% return of the S&P.
And although three analysts gave consumer discretionary stocks an “outperform” rating, three others predicted “underperform,” missing the mark for a sector that returned 22%.

Continuing a pattern from previous years, nine analysts gave thumbs up to the information technology sector, which turned in a respectable performance at 13%, though that still trailed the S&P by a hair.  The one good call was on utilities, which three analysts rightly gave thumbs down—it lost 3%.

“These strategists are being asked to do an impossible job,” Meyer says.  It has long proven impossible to predict consistently which sectors will outperform or whether growth stocks will outdo value stocks, small caps will beat large caps, or dividend-paying stocks will outperform those that don’t make payouts to shareholders, he notes.  Even when an analyst gets it right one year, the next year’s guess is likely to be wrong.  For investors, Meyer says, it’s much better to stick with the tenets—and the track record—of modern portfolio theory.

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