What the Experts Aren’t Telling You About 2009

An article published yesterday on Bloomberg.com contains a table summarizing the predictions of Wall Street strategists for the performance of the S&P 500 in 2009. They’re a pretty optimistic bunch, predicting an average increase of 17% this year (with a range between negative 3.2% and positive 44%!). Surely that’s great news for stock investors.

Although the article expresses some skepticism, it doesn’t go far enough. Allow me to point out these Wall Street emperors' lack of clothing, and state what should be obvious:

No one knows where the S&P 500 will finish 2009
No one. Not me, not the strategists at Goldman Sachs (NYSE: GS  ) or Morgan Stanley, not Fool co-founders David or Tom Gardner, not Ben Bernanke. Not even Warren Buffett. (He'd be the first to say so). No one.

A very basic way to value the S&P 500 would require an estimate for the 2009 earnings of the companies in the index. The following table shows the change in the consensus estimate of 2009 earnings per share (EPS) for three companies in the S&P 500:

 Company

Change in Current Fiscal Year EPS Estimate,
Last 12 Months

Bank of America (NYSE: BAC  )

(70%)

JPMorgan Chase (NYSE: JPM  )

(69%)

American Express (NYSE: AXP  )

(35%)


Those numbers suggest there is quite a bit of uncertainty in the experts' estimates, which could easily overwhelm our strategists' rosy prognostications like a tsunami.

You might protest that a lot has happened over the past 12 months and that these companies are in one of the hardest-hit sectors over that period. I'd respond that a lot could happen over the next 12 months, but I’ll accept the argument.

The table below shows the change over the last 90 days in the consensus EPS estimate for three companies in different sectors. No one will say that we weren’t deep into the current crisis 90 days ago -- Lehman Brothers had already gone into bankruptcy.

Company

Current 2009 EPS Estimate

2009 EPS Estimate,
90 Days Ago

Change in 2009 EPS Estimate,
Last 90 Days

Intel (Nasdaq: INTC  )

$0.81

$1.44

(44%)

ExxonMobil (NYSE: XOM  )

$6.29

$9.22

(32%)

General Electric (NYSE: GE  )

$1.39

$1.92

(28%)


The changes are smaller, but they remain substantial. Note that all six companies are among the most closely followed in the world.

It can be an interesting and worthwhile intellectual exercise to value the S&P 500 and speculate about its possible evolution over the course of a year. However, the worth is more in developing alternative scenarios and assigning them different probabilities and less about the final number. It’s no more than an intellectual exercise. I certainly wouldn’t recommend it as the basis for investment decision-making.

In the realm of speculative fiction
In investing, it takes thought and effort to make useful statements about what may or may not happen over the next three to five years. A one-year time frame is the realm of speculative fiction.

But as long as we’re speculating, the Wall Street strategists look awfully upbeat to me. Apparently, I’m more inclined to imagine a multiyear slump than they are -- I think a 7% or 8% increase in the S&P 500 would be a great outcome. (For what it’s worth.)

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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. Intel is a Motley Fool Inside Value selection. The Fool owns shares of and covered calls on Intel. American Express is an Inside Value pick and the Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2009, at 7:40 PM, BlueLakeVentures wrote:
  • Report this Comment On January 06, 2009, at 10:23 PM, olee100 wrote:

    I wish I were as optimistic as AD - It will get worse before it gets better. A big G (GE, AIG, GM, etc.) has to go before we get real.

  • Report this Comment On January 10, 2009, at 11:41 PM, DowntheBottom wrote:

    The above article criticizes the optimistic predictions of other marketeers and fund managers. Then, at the end, the author just cannot resist making his own predictions of a 7% - 8% rise in the S&P 500 - without any real justifications or reasons for this - it's just pure guesswork - and so he makes exactly the same mistakes as those that he criticizes.

    Unfortunately, fund managers and investors are NOT economists. The reasons I think that 2009 could well be as bad as 2007-8 are as follows:

    1. Peak Oil. This is predicted to hit us within the next 2 years. The price of oil is due to skyrocket again this year. How will the markets respond to this ?

    2. The dollar is due to collapse this year - in fact very soon. The US Treasury and Fed purchased £630 billion worth of swap pairs on the currency markets in October 2009 to prop up the dollar - these swaps are due to expire very soon, so the dollar will crash from its current false and overvalued position. How will this affect the US markets ?

    3. America's huge Fiscal Debt of £60 trillion. Currently, both Asia and Europe pay this debt for America via the continual purchase of Treasury Bills. But it is very likely that countries like China and Russia will get fed up of supporting the dollar and will eventually contribute to its demise. How will this affect the US markets?

    4. Climate Change. Business impacts and costs.

    The key to all this is the US Greenback. My market advice is quite simple. Do not invest in America, do not invest in dollar denominated stocks. Invest in Asia, this is a far better prospect than America. Jim Rogers and Marc Faber advise this, and I agree with them. Also, hedge your dollars and buy gold to maintain your capital value.

    Any other investment strategy - as I see it - would be pretty dumb.

  • Report this Comment On January 11, 2009, at 12:17 AM, NightBengal wrote:

    For the record, DowntheBottom... Alex was not predicting a 7 to 8% rise in the S&P. He said that would be a great outcome, as in, it's probably above what he's thinking. Note that he never actually said where he thought it would wind up; in fact, he specifically stated he thought a multi-year slump was likely.

    Cheers,

    NightBengal

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