Swedroe: Gurus Mostly Strike Out – Again

July 07, 2017

At the start of each year, I compile a list of predictions that gurus have made for the upcoming year, along with some items I frequently hear from investors—sort of a consensus of “sure things.” I keep track of these sure things with a review at the end of each quarter.

With the turn of the calendar, it’s time for our midyear review of 2017’s list. As is our practice, I’ll give a score of +1 for a forecast that came true, a score of -1 for one that was wrong and a 0 for one that was basically a tie.

Interest Rates Don’t Have Expected Effect

Our first sure thing was that the Federal Reserve would continue to raise interest rates in 2017, leading many to recommend investors limit their bond holdings to the shortest maturities. Economist Jeremy Siegel at one point even warned bonds were “dangerous.”  On March 15, 2017, the fed raised interest rates by 0.25%. It did so again on June 14, 2017. However, despite the prediction of rising rates having actually occurred, through June 30, 2017, Vanguard’s Long-Term Bond Index Fund (VBLIX) returned 6.4%, outperforming its Short-Term Bond Index Fund (VBIRX), which returned 1.1%, and its Intermediate-Term Bond Index Fund (VBILX), which returned 2.9%. Score: -1.

The second sure thing was that, with the large amount of fiscal and monetary stimulus we have experienced, in addition to the anticipation of a large infrastructure spending program, the inflation rate would rise significantly. On June 14, 2017, the Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers dropped 0.1% in May on a seasonally adjusted basis. The agency also reported that the index for all items rose 1.9% over the last 12 months. The index for all items less food and energy had risen just 1.7% over the 12 months prior to that. Score: -1.

The third sure thing was that with the aforementioned stimulus, anticipated tax cuts and a reduction in regulatory burden, the growth rate of real GDP would accelerate, hitting 2.2% this year. On June 29, 2017, the Bureau of Economic Analysis reported that GDP grew just 1.4% in the first quarter. What’s more, a second-quarter survey of professional economists lowered its full-year forecasts slightly to 2.1%. We’ll call this one a draw at this point. Score: 0.

Our fourth sure thing follows from the first two. With the Fed tightening monetary policy and our economy improving—and with the economies of European and other developed nations still struggling to generate growth, and with their central banks still pursuing very easy monetary policies—the dollar would strengthen. The dollar index (DXY) ended 2016 at 102.38. The index closed the second quarter at 95.63. Score: -1.


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