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Most economists believe that the UK will avoid recession, but recessions are unpredictable. Leading indicators point to good annual returns on the All-Share, but these relationships are prone to break down.
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It seems, then, that forecasts for the economy or market are not to be trusted.
Which is an unavoidable fact. The future is inherently unknowable, because we cannot know today what people will choose tomorrow; if we could, they wouldn't be choices, would they? What's surprising - and disturbing - about forecasts is not that they go wrong, but that they are ever right.
You might respond to this by ignoring macroeconomic punditry as mere babble, and instead look for shares that might be able to weather tough economic times. Four things, though, suggest that doing this is just as tricky as forecasting the macroeconomy.
Most obviously, the efficient market hypothesis (which is in truth closer to a fact than almost any other economic hypothesis) tells us that nothing you can know about a stock, in itself, will help you make risk-free money. The only useful knowledge is what you have but the market doesn't. And such knowledge is scant, because the market isn't stupid. It has, after all, outperformed most professional stock-pickers in the last year.
Second, if the aggregate market falls a lot, so will most stocks. In the last 12 months, only one in five FTSE 350 stocks have risen. The capital asset pricing model isn't wholly right, but it contains a huge truth: that stocks carry market risk, and you can't sensibly pick stocks independently of market direction.
Third, the collapse of value and loser stocks in the last few months has taught us that apparent cheapness is little help to investors. This crutch has woodworm.
Finally, the best research we have on the impact of recession upon company performance - Geroski and Gregg's Coping with Recession - says: "predicting which firm is likely to get into trouble is very hard". The sort of information that's available to investors is of little use in telling us how companies will fare in downturns.
Luckily, though, we don't need crystal balls. Another lesson of this bear market is that even when gilts and equities fall together, investors needn't lose a packet, simply because other assets - cash and some commodities - hold up well.
Capital preservation, then, is a lot easier than futurology. Which is just as well.
For more articles by Chris Dillow, see the MARKETS page or his columnist page. Chris blogs at http://stumblingandmumbling.typepad.com
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
