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It’s that time of year again. Businesses are closing their books on 2008, adding up profits and losses. The National Football League is toting up wins and losses, winnowing the field of would-be Super Bowlers. Fashionistas are compiling their lists of what’s hot and what’s not, assessing what should stay in their closets for the New Year and what gets tossed. Even the 2008 elections are nearly over, with votes still being tallied and scrutinized in just one major race.
Time for us at The Kiplinger Letter to take a look at our record for 2008: How close did we come to accurately forecasting major political, economic and business developments over the past year?
Let’s get the big one out of the way first: Did we foresee the current recession? Yes. We started the year pretty gloomy, noting in our last Letter of 2007, and again in January 2008, that the economy was teetering on the brink of recession. In March, The Kiplinger Letter actually said the economy was in recession. It turns out, according to the National Bureau of Economic Research -- the official arbiter of when a recession begins and ends -- that we were right. In November, the gurus at NBER declared that the U.S. was in a recession and had been since December 2007.
And no. The reality is nobody foresaw just how bad the credit markets would get. That changed everyone’s forecast. We ended up being too optimistic about how the ailing economy would respond to the federal government’s historic interventions in September. We expected that dramatic moves by the Federal Reserve and the U.S. Treasury Department to clear the decks of trillions in bad debt and unfreeze Wall Street credit markets would be more effective, more quickly than they have been, cutting the odds of a lengthy economic contraction. Nevertheless, throughout the year, we cautioned that the U.S. was in for a prolonged slump, and that employment and economic growth wouldn’t pick up significantly until well into 2009, at best.
As for related economic and business issues, plenty of our forecasts were right on the money:
- Housing. In January, we said that the light at the end of the tunnel was receding, and that it would be at least three years -- until 2011 --before the housing market would return to health. That still seems to be the case.
- The implosion of credit markets and equities markets. Here’s what we wrote in July 2007: “In today’s financial markets: There’s a smell of the Wild West…a risk-be-damned rush to make one’s fortune. And leverage is the wagon train. The liberal use of debt is worrisome.” “It’s time to exercise caution” on investments, we went on. “Consider taking some gains and building cash.” Oh, doesn’t everyone wish they had.
- Still, we won’t claim to have foreseen a nearly 40% decline this year in the Standard & Poor’s 500. Few, if anyone, did. And it’ll be years before we know how our current view pans out. Only fools try to pinpoint the bottom in market trends, but, as we said in July 2008 and have repeated several times since, the foundations of future gains are laid in bear markets. Careful purchases of quality equities today will yield profits in the years ahead.
- The bursting of the commodities bubble. In early April, we pointed out that prices for many key commodities were out of whack with supply and demand fundamentals -- spurred to unsustainable levels by investors chasing high returns. Since then, nickel prices have plunged from a high of $13.10 per pound to $4.85 a pound now. The cost of steel, copper, tin, platinum, zinc and silver has also taken a dive.
- As for oil prices, in particular, we thought they were wildly inflated earlier this year, attributing about $25 of April’s $105 a barrel price to speculative froth. As prices continued to climb into the summer, prompting forecasts of $200 a barrel oil forevermore from many economists and analysts, we stuck to our guns, noting in June that despite wild gyrations, the longer-term trend was down. With prices now running at $50 or less per barrel, the pendulum has swung too far in the other direction, and market fundamentals should pull prices back toward the $70 mark next year.
- The elections. In June, we suggested that Democrats were in reach of hitting a filibuster-proof majority of 60 in the Senate, beating all major political pundits to that conclusion by weeks. Moreover, our judgment that breaching the 60-seat mark was nevertheless unlikely and that a gain falling just shy of that was right on the money. What’s more, we called every single race correctly.
- Our political editors were also earlier than most to identify Barack Obama’s route to victory, noting that a number of previously solid GOP states couldn’t be counted on by John McCain. We’d narrowed the toss-up states to seven by early October and to five by the week of the election. All the states we saw leaning in one direction or another ultimately fell precisely as we forecast.
- U.S. involvement in Iraq. In March, we pointed out that a President Obama wouldn’t be able to exit Iraq rapidly, no matter what he said on the campaign trail. Now, awaiting his inauguration in January, the president-elect is acknowledging what we forecast 10 months ago.
- Legislation. Late in October, The Washington Times revealed in an “exclusive” front-page report that Sen. Edward Kennedy (D-MA) was working on a “secret” plan for health care reform. Secret? Not to our readers: Five weeks earlier, we’d told them that Kennedy was cooking up a proposal. Recently, the ailing Kennedy resigned his position on the Senate Judiciary Committee to devote his energies to his health care plan. He expects to introduce proposed legislation early next year.
- Foreign affairs. Russia is baiting Georgia, we said in May, raising the alarm about potential war in the region. In August, Russian tanks rolled through Georgian streets.
So what about goofs? Yeah, we had our share of them, too. We give you our best judgment based on the facts we have at any given time, tempered with years of experience. More often than not, we’re right. But sometimes -- well, not so much.
- The dollar. In March, we told our readers to expect the buck’s value to rebound later in the year, to something near $1.40 against the euro, based largely on a somewhat improved U.S. economy and a move by the European Central Bank to drop interest rates. The greenback’s value has, in fact, strengthened, and will end the year even higher than we expected. But it’s not because the U.S. economic outlook improved. It’s because the outlook for everyone else got even worse. However, in recent weeks the dollar has weakened again and will likely end the year only slightly stronger than last spring.
- Inflation. We started 2008 saying consumer prices at the end of 2008 would be 3% higher than in December 2007. But by May, we were swayed by high energy and food prices to bump that figure upward. Turns out we should have stuck with our first instinct. Inflation will measure out at just about 1%, December 2008 over December 2007. And neither we nor anyone else started 2008 worried about deflation.
- Airline fares. We called for increases, based on big cuts in capacity. Instead, fares (not counting all those pesky add-on fees) went down on average because, with the economy tanking, demand fell even harder and faster than capacity.
All in all, it’s been a pretty good year for forecasts. Still, here’s hoping that our forecasts for 2009 are both less gloomy and even more accurate. Have a happy new year, all.
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POSTED BY: sue (December 27, 2008 01:07 PM)
you were right most of the time
POSTED BY: Norm (December 28, 2008 10:23 PM)
Guys (and Gals) it's going to be all right. The key here is to eliminate your debt with what income you have. I'm currently using an online system that has taken my debt from being paid off in 10.1 years and reduced it to 2.5 years simply by following a payoff strategy of an online software. In two years, cash will be king and that should be everyone's goal.
POSTED BY: John Berseth (December 31, 2008 03:14 PM)
I'm a small-time investor in stocks to help fund my retirement. The Kiplinger Forecast continues to be my number-one source for information and predictions about how the financial markets will fare in the coming months. Thanks for all your good work.
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