From John Paulson’s call for a collapse in Europe to Morgan Stanley’s warning that U.S. stocks would decline, Wall Street got little right in its prognosis for the year just ended.
Bloomberg reports that Paulson, who manages $19bn in hedge funds, said the euro would fall apart and bet against the region’s debt. Morgan Stanley predicted the Standard & Poor’s 500 Index would lose 7% and Credit Suisse foresaw wider swings in equity prices.
All of them proved wrong last year and investors would have done better listening to Goldman Sachs Group Inc. (GS) CEO Lloyd C. Blankfein, who said the real risk was being too pessimistic.
The ill-timed advice shows that even the largest banks and most-successful investors failed to anticipate how government actions would influence markets. Unprecedented central bank stimulus in the U.S. and Europe sparked a 16% gain in the S&P 500 including dividends, led to a 23% drop in the Chicago Board Options Exchange Volatility Index, paid investors in Greek debt 78% and gave Treasuries a 2.2% return even after Warren Buffett called bonds 'dangerous'.
'They paid too much attention to the fear du jour', Jeffrey Saut, who helps oversee about $350bn as the Chief Investment Strategist at Raymond James & Associates in St. Petersburg, Florida, said by phone earlier this month. 'They were worrying about a dysfunctional government in the U.S. They were worried about the euro quake and the implosion of Greece and Portugal. Instead of looking at what’s going on around them, they were letting these macro events cause fear to creep into the equation'.
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