Swedroe: Scoring 2015’s ‘Sure Things’

January 11, 2016

At the start of 2015, I put together a list of predictions that financial “gurus” had made for the upcoming year, especially the ones that gained consensus as “sure things.” I then kept track, through a series of periodic updates, of whether these “sure thing” forecasts actually came to pass.

Well, the inevitable turn of the calendar into 2016 means that the most recent data is in, and it’s now time for our final review of the “sure thing” forecasts made back at the beginning of last year. As is our practice, we’ll give a score of +1 for a prediction that came true, a score of -1 for one that was wrong, and a score of 0 for one that’s basically a tie.

At the end of the first quarter, our score was +1/-7. These “sure thing” predictions fared a bit better by the end of the second quarter, with a score of +2/-6. But by the end of the third quarter, there were more “sure things” in the plus/true column (five) than in the minus/wrong column (three). We’ll now look at how they finished for the full year.

Rising Rates?

Our first sure thing was that, with the announced end in 2014 of the Federal Reserve’s program of quantitative easing, interest rates would rise. The fear surrounding rising rates often leads to the recommendation that investors limit their bond holdings to only the shortest maturities. In 2015, Vanguard’s Short-Term Bond Index Fund (VBISX) returned 0.9%. The firm’s Intermediate-Term Bond Index Fund (VBIIX) returned 1.2%. Score: -1.

The second sure thing was that economic growth, while remaining relatively tepid, would still improve over the course of the year. The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters predicted real GDP growth of 3.0% in 2015.

Unfortunately, a lot of the economic news to date has reflected a weaker, not a stronger, economy. First-quarter growth was small—0.6%. Second-quarter growth came in stronger, at 3.9%. However, growth decelerated in the third quarter as GDP grew just 2.0%. The current (fourth-quarter) forecast for full-year growth in 2015 from the Federal Reserve Bank of Philadelphia’s survey is just 2.4%. Score: -1.

The third sure thing was that, with the expected rise in interest rates and ongoing economic improvement, the dollar would strengthen. The dollar index closed out 2014 at 90.64. While the Fed just began to tighten monetary policy on Dec. 16, when it raised the target federal funds rate from a range of 0.00-0.25 to a new range of 0.25-0.50, and even though economic growth has remained tepid, the dollar index rose to end 2015 at 98.69. Score: +1.

The fourth sure thing was that—with the cyclically adjusted price-to-earnings (CAPE) ratio at about 27.5 as we entered 2015, roughly 70% above its long-term average—stocks would best be avoided. In 2015, Vanguard’s Total [U.S.] Stock Market Index Fund (VTSMX) returned 0.3%. VTSMX outperformed cash sitting on the sidelines waiting for a bear market, but underperformed Vanguard’s Short-Term Bond Index Fund (VBISX), which returned 0.9%. We’ll call that a draw. Score: 0.

Experts Get Small-Cap Performance Right

The fifth sure thing was that, given relative valuations, U.S. small stocks would underperform U.S. large stocks. Morningstar data showed the price-to-earnings (P/E) ratio of Vanguard’s Small Cap Index Fund (NAESX) stood at about 20, while the P/E ratio of the Vanguard 500 Index Fund (VFINX) stood at roughly 18. NAESX lost 3.8% in 2015 and underperformed VFINX, which returned 1.3%. Score: +1.

The sixth sure thing was that—with the non-U.S. developed-market economies teetering on recession and emerging markets hurt by falling commodity prices, the Fed’s tightening and a rising dollar—international stocks would underperform U.S. stocks last year. In 2015, Vanguard’s Total International Stock Fund (VGTSX) lost 4.4% and underperformed its U.S. counterpart, Vanguard’s Total [U.S.] Stock Market Index Fund (VTSMX), which gained 0.3%. Score: +1.

The seventh sure thing was that gold would rally, benefiting from global geopolitical and economic concerns in addition to monetary stimulus provided by the world’s central banks over the past six years. Gold closed 2014 at $1,184. Despite the various economic and political crises around the globe last year, gold closed 2015 at $1,060, down about 10.5%. Score: -1.

The eighth sure thing was that, after defying the gurus in 2014, the volatility of the market would rise. The VIX ended 2014 at 19.2. With the exception of a period in the third quarter of 2015, the VIX spent most of last year below that level. In fact, until mid-August, there were only seven days when it was above 20. It finished the year at 18.2. Score: -1.

This is the sixth year we’ve been keeping track of “sure things,” and we’ve yet to have one in which at least half have come true. Our final tally for 2015 is that three of the eight “sure things” actually happened. While a batting average of .375 would be great for a baseball player, a .375 free-throw shooting percentage would be awful. And I wouldn’t consider it very good here given that these predictions were “sure things.”

Keep in mind that if they really were “sure things,” all of them should have occurred. Note that if we consider the one draw (the score of 0) a bunt or a sacrifice fly, the batting average would improve to .428. That also would be great for a baseball player, terrible for a basketball player and still poor for a “sure thing.”

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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