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An Inconvenient Truth

December 16, 2013

Bruce Simon
Chief Investment Officer
City National Rochdale

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Every December, most investment firms publish their outlooks for the coming year. Their views are often based on reams of economic data, rigorously analyzed by teams of experienced professionals. Among the many factors considered are global and national economic trends, interest rates, central bank policies, currency movements, and inflation expectations. Their goal is to provide forecasts for investment performance of various asset classes for the coming year.

With so many firms performing this analysis on essentially the same publicly available data, one might presume that their conclusions would generally be quite similar. The reality is anything but: there is usually a very wide range of predictions about the year ahead, and most turn out to be wrong. Just this past week, two large well-known firms published their 2014 forecast for the S&P 500 Stock Index. One called for a 20% decline and the other predicted a gain of 17%. What accounts for such a wide discrepancy between views, and more importantly for the investor, whom should you believe?

The inconvenient truth is that predicting investment returns, particularly over the short run, is exceptionally hard. The investment industry is dotted with knowledgeable professionals who took an extreme position ("the crash is coming"), happened to get it right, and built a successful following despite subsequently being wrong more often than not. Whoever created the old adage "even a broken clock is right twice a day" must have had investment strategists in mind when it was conceived.

Predicting investment performance is a notoriously complicated affair, mainly because the world is an extremely complicated place. In addition to forecasting all of the factors cited above in a constantly changing global economic landscape, one must also factor in geopolitical risks, investor psychology, breakthrough innovations in technology, and the political motivations of unpredictable world leaders. It is no wonder that expectations are all over the map. How many foresaw the 25% jump in US stocks in 2013?

Despite all these caveats, clients expect and are entitled to asset class forecasts from their investment advisors. At City National Rochdale, we believe the U.S. economy will continue to gather strength in 2014, and interest rates are likely to experience only modest increases. We believe U.S. stocks will deliver solid returns over the next year, but not without significant bouts of volatility. Europe is expected to continue to muddle through on its multiyear path to recovery, and economic growth in the emerging markets will likely continue to outpace the rest of the world. Despite the prevalence of low interest rates, we believe there are still opportunities to generate attractive income in certain less-trafficked parts of the investment world.

In the messy and unpredictable world we live in, these are nothing more than highly educated guesses. To the question of whom to believe, we would offer that trust in your advisor is the most important factor. The inconvenient truth is that no one has a crystal ball, but working with an advisor who fundamentally has your best interests at heart increases your odds of success. And most importantly, never forget the value of diversification and risk management.

To all of our friends and clients, we wish you a safe and happy holiday season.

Investment and Insurance Products:
• Are Not insured by the FDIC or any other federal government agency
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate
• May Lose Value

City National Rochdale, LLC is a Registered Investment Advisor and wholly owned subsidiary of City National Bank.

This article is for information and education purposes only and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as of the date of this document and are subject to change. Clients should evaluate the merits and risks associated with relying on any information provided.

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