By Allan Roth, CBS MoneyWatch
(MoneyWatch) While I pride myself in knowing that I don’t know the future, I also love to look at probabilities. To that end, let’s take a look at my three predictions for 2013, along with my assessment of the probabilities they will be correct.
Stocks will rise — 70 percent probability. According to my analysis of Wilshire 5000 total return data, since 1970 U.S. stocks have had up years 76 percent of the time (that counts 2012 as an up year, which obviously isn’t over yet. Inflation ran higher during most of that time period, so I’ll make a rough adjustment for 2013, with inflation forecast to be low, and will slightly lower the probabilities. Stocks have been up an average of 10.2 percent annually over this period of time. The best year was 1975, when stocks surged 38.5 percent, and the worst was 2008, when stocks plunged 37.3 percent.
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Bonds will earn below their historical average — 90 percent probability. I’m not one to predict longer term interest rates, but I can use logic and math to make this prediction. According to Morningstar, the Barclays Aggregate Bond Index return has averaged a 5.97 percent annual return over the past five years. This is even better than the previous five years, when interest rates were higher. Most of the five-year return has come from the declining interest rates that cause bond prices to rise.
By my calculations, the yield on this bond index would need to drop from 1.69 percent to roughly 0.84 percent for another six percent annual return. That would require the five-year Treasury, a large component of the Barclays index, to yield about zero. Though possible, it’s unlikely.
Investors betting on historical averages for bonds have a zero percent chance of being right in the next five years. I’ve seen many professional investors betting clients’ portfolios on this possibility, and they are at least 99.9 percent likely to be wrong, in my view.
Investors will be late to the game — 99.9 percent probability. If we have rising Interest rates next year, I predict the 2012 investor cash flows into bonds will reverse next year. Don’t rely on the Federal Reserve’s promise to keep rates low, as they only control the overnight interest rate. The market and inflation expectations determine intermediate and long-term interest rates. I predict money will pour into whatever asset class or sector of the stock market is getting its 15 minutes of hotness. How can I be so sure? History and human nature.
Sure, these predictions lack the kind sensational sexiness that revs up the investing motor. But if one is willing to set that factor aside, you’re likely to find them more financially gainful than the kind of predictions you’ll be hearing from the usual financial gurus. The not-so-sensational truth is that investing amounts to going with the odds and being consistent. Relying on “exact” predictions of what stocks will be hot in 2013 does neither and has little chance of working in the long run.