Research by Weston J. Wellington, vice president, Dimensional Fund Advisors Inc., "illustrates the challenge of using economic forecasts to enhance portfolio returns," even "assuming one had correctly predicted the U.S. would slip into recession in March 2001." To wit, making a short-term tactical portfolio shift to place the obvious bet on the economy didn't turn out to be promising in terms of stock return.
In the Santa Monica, Calif.-based DFA's periodic report on investment management research, he noted that in light of a recession, "investors are customarily urged to avoid companies selling big-ticket items whose purchase can easily be deferred by nervous consumers or businesses, and to emphasize firms whose fortunes are relatively unaffected by (gross domestic product) trends.
"Following this logic, an investor would have avoided companies selling homes, jets, computers and pricey motorcycles in favor of soft drinks, lipstick, movies and cough drops."
But the performance in 2001 of 20 widely held stocks shows even accurate economic predictions can be tripped up.
The stocks with upbeat performance included Best Buy Co., which had a total return, including dividends reinvested, of 151.94%; Ryland Group Inc., 80.19%; Dell Computer Corp., 55.87%; Lockheed Martin Corp., 39%; Harley-Davidson Inc., 36.86%; and Illinois Tool Works Inc., 15.29%.
The stocks with poor returns included Campbell Soup Co., returning -11.29%; Starbucks Inc., -13.9%; Walgreen Co., -19.19%; Bristol-Myers Squibb Co., 25.98%; Safeway Inc., -33.2%; and Merck & Co., -35.9.
"The stocks that seemed most vulnerable to a recession actually did quite well, while those stocks that on face value should have weathered the recession appeared to have trouble," the study found. "Even when you get the forecast right, making a tactical move can be slippery business," he said in an interview.