2012: How Wall Street got it wrong

From hedge fund manager John Paulson's call for a collapse in Europe to Morgan Stanley's warning that US stocks would decline, Wall Street got little right in its prognosis for the year just ended.

Paulson, who manages US$19 billion in hedge funds, said the euro would fall apart and bet against the region's debt. Morgan Stanley predicted Standard & Poor's 500 Index would lose 7 per cent 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' chief executive Lloyd 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 US and Europe sparked a 16 per cent gain in the S&P 500 including dividends, led to a 23 per cent drop in the Chicago Board Options Exchange Volatility Index, paid investors in Greek debt 78 per cent and gave Treasuries a 2.2 per cent return even after Warren Buffett called bonds "dangerous".

"They paid too much attention to the fear du jour," said Jeffrey Saut, the chief investment strategist at Raymond James & Associates in Florida.