The Crystal Ball: Revisiting 2010

Almost a year ago, I wrote an article called The Crystal Ball: TSX Over the Next Three Years. In it, I predicted that the stock market growth would follow the pattern of what happened during the recovery after the last recession and bear market. Of course, I didn’t seriously expect history to repeat itself, but thought it likely that something similar (a recovery) would take place. Let’s see what I got right and what I got wrong.

First, what I got right. The market bottom was past and I guessed that the market would continue to recover. I also predicted, sufficiently vaguely, that the TSX would end the year of 2010 somewhere over 13,000. The actual market level at the end of the year appears that it will be closer to 13,500. Given that the market tends to rise in roughly 3 of 4 years, an easy way to predict market movement with 75% accuracy is to predict growth.

Now, what I got wrong. The magnitude of the growth over 2010 was something I underestimated. I had predicted 13% growth for the year, whereas the actual return will be around 14.4%. I was also wrong about the path I suggested the market might take. I illustrated a couple slow months at the beginning of the year, followed by steady growth throughout the remaining months. That was not at all our experience in 2010. The market began the year fairly reasonably valued, correcting in late January before recovering in February. It then moved sideways at about the level it began the year and then dropped again in late June to approximately the same level as late January.  This is to say that the first half of the year actually provided a negative return. An intrepid investor to buy in late June or early July, however, would have experienced about a 20% return, benefiting from the relatively consistent growth over the last half of the year.

Why was I more wrong than right? First, I don’t really know where the market will go. It’s impossible to see the future and even the most promising clues cannot reveal what will happen. In fact, no one knows what 2011 will bring so please, ignore predictions from self-styled market experts.

Having said that, do I stand by my prior prediction for 2011? Given that I didn’t really believe it in the first place, it would be foolish to start believing it now. Will 2011 be a less profitable year, returning around 6%? It could, and so I personally prefer to invest for income rather than capital gains. Given our recent experience, I wouldn’t be surprised to see the first few months of the year produce better returns than the summer months. That’s often the case. I do expect the economic recovery to continue (not without some bumps along the way) and that should be supportive of the stock market. I also expect the bull market in resources to continue to influence market performance in Canada.

We’ll check back next year. I hope 2011 is a prosperous year for all!