It’s easy for forecasters and amateur statisticians to draw future market conclusions based on select past performance. At every twist and turn of the credit crisis investors have compared and contrasted the current recession with those of the past. In a recent research report Goldman Sachs goes into the many similarities between 2003 and 2009 and the potential for 2010 to mirror 2004. Goldman notes:
As the macro data flow has slowed to a trickle, the weight of the evidence still points to continued, but gradual, improvement. And beyond the data momentum, financial conditions remain supportive for equity risk generally, and for our tactical long positions as well. 2004 contained many similar challenges to what we face on the cusp of 2010: waning cyclical momentum, fiscal drag and exit policy fears.
Based on these similar macro themes Goldman draws some conclusions as to how to play the potential 2010 outcome based on the performance of various asset classes in 2004:
Clear direction emerges earlier in sectors and macro themes relative to the index. Cyclical sectors, and not defensives, were still the right places to be long in 2004, the energy sector was a clear relative outperformer from early in the year, and cyclical macro tilts such as Growth and CHICON
break out on the upside from mid-2004. But in most cases, the overall returns over the year are in modest single digits with several intra-year ups and downs. If next year is anything like 2004 in this respect, then timing entries and exits nimbly will be as important as identifying the right places to be long and short.
For those that remember, 2004 was an extraordinarily mundane year for equities following the excitement of 2003. Volatility slowed to a trickle and equity returns were closer to the historical norm. Goldman believes this, combined with a weaker economy, will make for a much more challenging investing environment:
But in each case, the overall returns over the year are in modest single digits with several intra-year ups and downs. If next year is anything like 2004 in this respect, then timing entries and exits nimbly will be as important as identifying the right places to be long and short. And, with recent momentum at our backs, we do think that culling winners even at modest returns, may be in order.
Of course, as I’ve often pointed out, it’s fairly foolish to base ones investment decisions based on one data point out of hundreds. In my opinion, the current deleveraging process is unlike any recession the modern economic world has ever seen and that means the outcomes are unpredictable based on past data. The challenges ahead of us are numerous and the differences between the business based recession of 2003 and the consumer based recession of 2009 are staggering. But who am I to say that the almighty Goldman Sachs is wrong?