"If something cannot go on forever, it will stop."
"Economists are very good at saying that something cannot go on forever, but not so good at saying when it will stop."
Herbert Stein was an old school economist with a quick wit. These three quotes are always useful as we enter the end of year forecasting season. Market analysts have to provide their views for 2010, yet there will be a good chance they will be wrong within a month or two. The strong convictions of year may sour quickly, or as Charles Darwin stated, "Ignorance more frequently begets confidence than does knowledge."
There are two themes which we think will be very important for the year.
First, market uncertainty may not be diminishing in 2010. Yes, volatility as measured by the VIX has fallen. The movement in daily prices has been less exaggerated, but it is not clear whether the current direction of markets will continue.
Second, the trend is not always your friend. Trends are a good thing to follow but remember that there will come a time to reverse positions because trends will stop. Look at the dollar move in the last month. This may not be a reversal of the dollar bear decline but a one-way market is the exception not the norm.
Watch out for the unexpected which means that maximum diversification should still be the focus of portfolio construction.
There are two themes which we think will be very important for the year.
First, market uncertainty may not be diminishing in 2010. Yes, volatility as measured by the VIX has fallen. The movement in daily prices has been less exaggerated, but it is not clear whether the current direction of markets will continue.
Second, the trend is not always your friend. Trends are a good thing to follow but remember that there will come a time to reverse positions because trends will stop. Look at the dollar move in the last month. This may not be a reversal of the dollar bear decline but a one-way market is the exception not the norm.
Watch out for the unexpected which means that maximum diversification should still be the focus of portfolio construction.
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