Proceed With (Much) Caution But Some Reasonable Thoughts on Forecasting

Jason Zweig has a nice article on the perils of forecasting in the WSJ
Why Market Forecasts Keep Missing the Mark

Fish gotta swim, birds gotta fly and analysts and market strategists gotta try predicting what stocks will do every year. But you don't gotta act on those predictions -- at least not before you ask how likely they are to hit the bullseye.
Nonetheless he cant resist presenting one method for forecasting which one can at least call reasonable if not necessarily guaranteed to be accurate:
So is all prediction pointless? Not quite. In an important new study for the National Bureau of Economic Research, finance professors Miguel Ferreira and Pedro Santa-Clara of Universidade Nova in Lisbon, Portugal, have developed a sophisticated method to predict future results.

You can do a roll-your-own version. Take the dividend yield on stocks (3.4%), then add the annual rate of earnings growth over the past 20 years (3.4%). That's 6.8%, what John C. Bogle, founder of the Vanguard funds, calls the "investment return."
Next, factor in the "speculative return." The price/earnings ratio on the S&P 500 is around 15. If investors pay more than 15 times earnings for stocks down the road, the market will rise more than 6.8% a year; if they set lower P/Es, the overall return will be less.

Earnings are likely to keep falling, and investors are unlikely to set higher valuations anytime soon, so 6.8% is probably high. For 2009, Messrs. Ferreira and Santa-Clara forecast a 4.2% return. But over the longer term -- five years and beyond -- I think stocks could gain at least 7% a year. That would be worth sticking around for.

Along the way, the Dow might slump to 6000, or drop 10% or more in a day. But just as huge losses often come out of a clear blue sky, gains can arrive when the world seems darkest. If you forecast the market with your gut feelings alone, you may never hit the target.

In my view here is something to ponder given this forecast. With funds like the Vanguard Intermediate Term Corporate Bond Fund yielding 5.86 and the ishares Investment Corporate Bond Fund (lqd) yielding 5.55% may merit an allocation in your portfolio. (this is not a recommendation and personal objectives must be considered when investing)

The chart at the top of the page is a ten year chart of the S&P 500 for the last ten years. Proceed with extreme caution and humility when forecasting.