It is understandable that investors, who are inclined to worry anyway, have concerns about the economic environment. After all, they’re facing slow economic recovery, scary monetary policy, fears of a hard landing in China, geopolitical risks, lingering doubts about the euro, and stock and bond markets that aren’t cheap. So said Martin Barnes, Chief Economist at BCA Research, as he kicked off the forecasts at CFA Society Toronto’s Annual Forecast Dinner, held in Toronto on 8 October 2013.

Barnes also pointed out that Canada, with its sounder fiscal policy, healthier markets, and calmer politics relative to the U.S., also has “an economy joined at the hip to the U.S., alarming consumer debt levels, and cloudy commodity prospects.” Despite these challenges, he predicted a recovery in Canadian economic growth towards its long-term trend, based on an expectation of continuing favourable credit conditions, little risk of inflation in the medium term, and gradually improving global economic growth.

Investors will feel better about the economy in a year’s time, he said, but “they still won’t feel great.” Specifics of his forecasts included:

• economic growth in the U.S. and Canada of about 3 percent in 2014,
• no increase in underlying inflation in the coming year,
• 10-year bond yields still under 3.5 percent in a year’s time,
• equity returns of around 8 percent over the next 12 months, and
• a Canadian dollar close to parity a year from now.

Outlook for U.S. stocks

“Advantage America” was the title of the address by leading U.S. economist, capital markets analyst, and commentator Gary Shilling. However, in the current “age of deleveraging” in the U.S., he forecast only 2 percent economic growth for the next several years and cautioned that stocks are somewhat vulnerable, owing to their generous P/Es and record high profit margins. Compared to other countries in the world, though, Shilling predicted a relatively good performance for the U.S. economy and stock markets, based on:

• favourable U.S. demographics (including relatively favourable immigration, fertility rates, and trends in working-age population),
• robust productivity growth and improved labour market flexibility, with declining union membership as a percentage of the workforce,
• a declining need for foreign financing,
• increasing energy independence,
• a strong entrepreneurial spirit in the economy, and
• a robust U.S. dollar.

He added that the U.S. can still claim to be the world’s largest economy, with the deepest and broadest financial markets, the freest and most open markets and economy, and the greatest international credibility.

Human behaviour

Barry Ritholtz, popular commentator (The Washington Post, The Big Picture), author (Bailout Nation), and CEO of Fusion IQ, brought the perspectives of behavioural finance to the proceedings by noting that human beings are not wired psychologically for forecasting. The herding effect, the recency effect, optimism bias, selective perception and retention, and the Dunning–Kruger effect (a cognitive bias in which unskilled individuals suffer from illusions of superiority due to an inability to recognize their own mistakes) all combine to result in the average expert forecaster doing no better than the general public. Only 20 percent of forecasters and fund managers outperform their benchmarks in any given year, Ritholtz said, and only 3 percent remain in the top quintile for five years or more. After fees are taken into account, only 1 percent outperforms their benchmarks over five years.

Notwithstanding these daunting odds, CFA Society Toronto President Josephine Marks reviewed some of the results of last year’s forecasters’ predictions, which were remarkably insightful in many cases. Among the most prescient were those of the winner of the annual audience benchmark prediction contest, Rob Chepelsky, CFA , Managing Director Fixed Income Products at Manulife Asset Management, whose forecasts for the Canada 10-year bond yield and the exchange rate for the Canadian dollar were exactly right to the nearest 10 basis points and the nearest cent, respectively—a reminder that good foresight at the annual forecast dinner is not confined to the podium.