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For stock market prognosticators, 2008 was not a year on which to build your résumé.

The S&P/TSX composite index forecasts that Canada's leading strategists made at the start of the year ranged from the modestly misguided to the wildly inaccurate, as the volatility and turmoil of the year outstripped even the boldest of predictions. A partial survey of their January, 2008, outlooks reveals a median year-end forecast for the index of 13,000 – a gaping 4,000 above the actual levels in the final week of the year.

Back in January – with the TSX already down 15 per cent from its high of the end of October, 2007 – there was some hope that the bear market was closer to its end than its beginning. Not even the most bearish forecasters imagined the severity and speed of the global economic erosion, or the brutal impact of the credit crunch, that actually unfolded over the fall.

“In the world of forecasting, getting both the ‘what' right and the ‘when' right at the same time is something that doesn't happen as frequently as you would like,” said George Vasic, chief economist and strategist at UBS Securities Canada Inc.

“Forecasters are kidding themselves if they think they can precisely anticipate either what's going to happen or exactly what it's going to mean as far as market movements,” said David Wolf, Merrill Lynch's head Canadian economist and strategist.

Mr. Vasic and Mr. Wolf are a study in contrasts for their 2008 predictions, because they represented vastly different views when the year began – Mr. Vasic seeing the S&P/TSX composite headed for 15,000 by the end of this year while Mr. Wolf warning that a drop below 10,000 was possible. We asked both of them to revisit their thinking in the light of what actually transpired.

GEORGE VASIC – UBS Securities Canada THE CALL: Mr. Vasic was willing last January to acknowledge that the U.S. economy might have been entering a recession, but predicted that the economy would bottom by the fall – consistent with the duration of previous U.S. recessions. Noting that stocks “have consistently bottomed four to six months ahead of [recessions'] end,” he predicted that stocks would bottom in the first quarter of the year before turning upward.

IN HINDSIGHT: “The forecast was realized – we were at 15,000 in the middle of June,” he said. However, “we were not expecting that the [subprime] crisis would turn into what it did. … It seemed at the time [in January] that more of the risk was sooner rather than later.”

Despite seeing the market cut almost in half from his target by late in the year, Mr. Vasic said some key elements of his forecast weren't nearly as far off the mark.

“The earnings outlook we had then for '08 basically came true,” he said. “But what happened is that with the crisis we got late this year, and therefore the deterioration in the outlook for '09, the valuation for those earnings plunged.”

He noted that at the end of 2007, price-to-earnings multiples on the TSX (based on trailing 12-month earnings) were about 16.5 times. Now, they're about 10 times.

“The lesson here is that when you get this type of dislocation, it really doesn't emanate within the equity market itself, but the spillover effect is that it substantially reduced the valuations investors are willing to place on equities.”

PREDICTION FOR 2009: Mr. Vasic said his 2009 forecast has an “eerie resemblance” to his 2008 forecast – he's again looking for a turnaround in the second half of the year, with the stock market bottoming ahead of the economy.

“In '09, I think the question again will be more on the valuation side,” he said.

His 2009 year-end target for the S&P/TSX composite is 12,500 – even though he expects earnings to contract 20 per cent in the year. He sees the index improvement coming from a rebound in P/E valuations to something near a more normal 16 times by the end of the year.

“The big downside risks are still in the first three months of the year,” he said. “But if the measures the Fed, the Bank of Canada, etc. have put in continue to work, I think you can get a 15- to 20-per-cent rise in the market in very short order.” DAVID WOLF – Merrill Lynch Canada THE CALL: On Jan. 21, 2008, Mr. Wolf slashed his S&P/TSX forecast to 11,300 from 13,300, and warned that the market could bottom below 10,000, citing Merrill's call at that time that the U.S. economy was already in recession.

“That was something of a non-consensus view at the time, as well as something that clearly wasn't priced into [market] expectations,” he said recently.

In that January, 2008, report, Mr. Wolf warned that this deteriorating view would mean a slowdown in Canada's domestic economy, a significant deterioration in commodity prices – a key for the resource-heavy Canadian index – and an outright decline in S&P/TSX earnings for the year.

“Valuations can hardly help but be pressured by earnings disappointments … as well as by the higher risk premiums being increasingly embedded into global markets,” he wrote.

IN HINDSIGHT: Although Mr. Wolf's actual forecast for the S&P/TSX index, despite its bearishness, proved still too rosy for the market calamity that followed, his analysis of the forces that would conspire against Canadian stocks was prescient.

“The market went down more than we thought and more quickly than anybody would have anticipated through the fall,” he said. “The important part for us is to get things directionally correct, and to do so in a way that's ahead of where the market is. And in that, I think we did a reasonably good job.”

“We didn't think commodity prices would be as volatile as they turned out to be,” he said. And on the credit market side, “I don't think myself or anyone else on our team expected things to transpire quite as dramatically as they have over the past three or four months.”

“One great challenge in what a lot of [forecasters] do is on the timing side,” he said. “You can see stresses building up in the system, but seeing when they are going to break is much more difficult. And one thing that has become abundantly clear over the past several months is that when these stresses do ultimately break, they don't break gently.”

PREDICTION FOR 2009: “I think we're largely going to be searching for a bottom through 2009. I'm not convinced that we're going to find a bottom. I do think it's going to be another down year for Canadian equities.”

His 2009 year-end forecast for the S&P/TSX composite is 8,000, although he expects the market to trade below that level during the year. He sees Canadian stocks bottoming around midyear, preceding an economic turnaround near the end of the year. And he expects TSX earnings to slump 35 per cent in the year.

A key to a stock market turnaround, he said, is for “greater visibility” of the direction of the global economy, as downside economic risks continue to depress valuations. And he stressed that Canadian investors still need to lower their expectations for the market's growth potential.

“At the end of the day, the world has changed. The world that we got used to, that prompted the bull run from 2002 to 2007, doesn't exist any more. And I don't think we've put in a bottom until investors fully recognize that.”

WHAT OTHER STRATEGISTS SAID – JANUARY, 2008

Jeff Rubin, CIBC World Markets

S&P/TSX 2008 year-end target: 13,000

“The TSX now faces the prospect of sustained selling pressure over the next quarter and possibly as long as the next six months. We see a midyear low of 11,000 followed by a spirited 2,000-point recovery over the second half of the year, as central bank easing and a gradual reduction in subprime mortgage refinancings allow the index to climb back.”

Clément Gignac, National Bank Financial

S&P/TSX 2008 year-end target: 12,800

“Although capital markets can be expected to remain volatile for some time and further softness on North American equity markets cannot be ruled out, our comfort zone has been increased significantly by the recent bold moves from U.S. policy makers, suggesting that any consumer-led recession should be mild. … As a result, we have decided to remove our previous underweight recommendation on equities to adopt a more neutral stance.”

Vincent Delisle, Scotia Capital

S&P/TSX 2008 year-end target: 13,500

“We would peg the downside risk to 5 per cent for the S&P 500 and 8 per cent for the TSX. Equities should stage a 15-to-20-per-cent rally once leading indicators trough, which is unlikely before the end of Q2/08. Relative to long-term bond yields hovering below 4 per cent, equities are looking increasingly attractive, and we will be looking to raise our equity position on pullbacks through the first half.”