Swedroe: ‘Sure Things’ That Didn’t Pan Out

April 08, 2015

Each January, I put together a list of predictions that financial “gurus” have made for the upcoming year—sort of a consensus of “sure things.” I then keep track of whether or not these “sure thing” predictions have actually come to pass.

 

The turn of the calendar into April means that it’s time for our first quarterly review. As is our practice, we’ll give a score of +1 to a forecast that came true, a score of -1 to a forecast that was wrong, and a score of 0 to one that was basically a tie.

 

Interest Rates Fail To Rise

Our first sure thing was that, with the announced end in 2014 of the Federal Reserve’s quantitative easing program, interest rates would rise. Fear of rising rates often leads to the recommendation that investors limit their bond holdings to only the shortest maturities.

 

But in the first quarter of this year, Vanguard’s Short-Term Bond ETF (BSV | B-69) returned 0.98 percent, the firm’s Intermediate-Term Bond ETF (BIV | B-52) returned 2.43 percent, and its Long-Term Bond ETF (BLV | C-99) returned 3.35 percent. That’s one sure thing that hasn’t happened—at least so far. Score: -1.

 

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

 

Unfortunately, almost all the economic news so far has reflected a weaker, not a stronger, economy. That has led most forecasters to lower their estimates for first-quarter GDP growth to between about 1 and 1.5 percent. Score: -1.

 

Our third sure thing was that, with the Fed tightening monetary policy and the economy improving, the dollar would strengthen. The dollar index ended 2014 at 90.64. While the Fed has not yet begun to tighten, and economic growth actually slowed, the dollar index ended the first quarter of this year at 98.66. Score: +1.

 

 

Unexpected Valuations, Performance

The fourth sure thing was that—with the CAPE at about 27.5 as we entered the year, about 70 percent above its long-term average—stocks would be best avoided. But Vanguard’s Total [U.S.] Stock Market ETF (VTI | A-100) has returned 1.76 percent so far in 2015. VTI outperformed cash sitting on the sidelines waiting for a bear market as well as Vanguard’s Short-Term Bond ETF, BSV. Score: -1.

 

The fifth sure thing was that, given relative valuations, U.S. small stocks would underperform U.S. large stocks. Using Morningstar data, the price-to-earnings ratio (P/E) of Vanguard’s Small Cap ETF (VB | A-100) stood at about 20, while the P/E ratio of the Vanguard 500 ETF (VOO | A-98) stood at 18. Ignoring all the warnings, VB returned 4.75 percent, outperforming VOO, which returned 0.91 percent. Score: -1.

 

The sixth sure thing was that—with the non-U.S. developed-market economies teetering on recession and emerging markets hurt by failing commodity prices, the Fed’s tightening and a rising dollar—international stocks would underperform U.S. stocks this year. But through the first quarter, Vanguard’s Total International Stock ETF (VXUS | A-99) returned 4.03 percent and outperformed its U.S. counterpart VTI, which returned 1.76 percent. Score: -1.

 

The seventh sure thing was that gold would rally, benefiting from global geopolitical and economic concerns as well as all the monetary stimulus provided by the world’s central banks over the past six years. Gold closed 2014 at $1,184. It finished the first quarter almost exactly where it started, with a closing price of $1,187. Given that’s a gain of 0.25 percent, below the return on safe short-term bonds, we have to put this in the negative column. Score: -1.

 

Volatility Falls

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. It closed the first quarter at 15.3. Score: -1.

 

Our ninth and final sure thing was that active management would beat passive in net returns. A 2014 survey of professional advisors found that, despite all the evidence to the contrary, an astonishing 75 percent of them believed that active management would outperform. While I’m confident this won’t turn out to be correct, we’ll wait until Standard & Poor’s produces its scorecard before giving an official score.

 

Our final tally: one sure thing that actually turned out to be true and seven that didn’t. Keep in mind that if all this conventional wisdom was truly a “sure thing,” most—if not all—should have happened. But there’s hope. After all, we still have three quarters to go. We’ll report back again after the second quarter.


Larry Swedroe is the director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.

 

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