Swedroe: 2015’s ‘Sure Things’ At Halftime

July 08, 2015

Every January, I put together a list of predictions that financial “gurus” have made for the upcoming year, especially the ones that gain consensus as “sure things.” Through a series of periodic updates, I keep track of whether these “sure thing” forecasts actually came to pass.

 

The turn of the calendar into July means it’s now time for our second-quarter review. As is our practice, we 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 was basically a tie.

 

Interest Rates And Economic Growth Rising?

Our first sure thing was that, with the announced end last year 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.

 

Through June 30, the Vanguard Short-Term Bond ETF (BSV | B-69) returned 0.9 percent. The firm’s Intermediate-Term Bond ETF (BIV | B-52) returned 0.4 percent. While the Fed has not yet acted to raise rates, so far in 2015, this recommendation has been correct. 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 percent in 2015. Unfortunately, almost all the economic news to date has reflected a weaker, not a stronger, economy.

 

First-quarter growth clocked in at just 0.2 percent. What’s more, the most recent forecast for full-year growth in 2015 from the Federal Reserve Bank of Philadelphia’s survey is now just 2.4 percent. Score: -1.

 

A Hit And A Few Misses

The third sure thing was that, with the expected rise in interest rates and ongoing economic improvement, the dollar would indeed strengthen. The dollar index ended 2014 at 90.64. While the Fed has not yet begun to tighten monetary policy, and economic growth actually slowed, the dollar index has risen to about 95.52. Score: +1.

 

 

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 best be avoided. But Vanguard’s Total Stock Market ETF (VTI | A-100) has returned 1.8 percent thus far in 2015. VTI outperformed both cash sitting on the sidelines waiting for a bear market and Vanguard’s Short-Term Bond ETF. Score: -1.

 

The fifth sure thing was that, given relative valuations, U.S. small stocks would underperform U.S. large stocks. Data from Morningstar showed that the price-to-earnings (P/E) ratio of Vanguard’s Small Cap ETF (VB | A-99) stood at about 20 and the P/E ratio of the Vanguard 500 ETF (VOO | A-99) stood at roughly 18. Ignoring all the warnings, VB returned 4.1 percent through the second quarter, outperforming VOO, which returned 1.2 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. Despite the current crisis in Greece and the threat of contagion, Vanguard’s Total International Stock Fund (VGTSX) returned 5.4 percent and outperformed its U.S. counterpart (VTSMX), which returned 1.8 percent. Score: -1.

 

Gold And Volatility Disappoint
The seventh sure thing was that gold would rally, benefiting from global geopolitical and economic concerns in addition to all the monetary stimulus provided by the world’s central banks over the past six years. Gold closed 2014 at $1,184. Despite the Greek crisis, gold closed the second quarter at $1,172, down about 1 percentage point. Score: -1.

 

The eighth sure thing was that, after defying the gurus in 2014, the volatility of the market would rise. VIX ended 2014 at 19.2. Even in the middle of the Greek crisis, the VIX closed the second quarter at 18.2. Score: -1.

 

Our final tally at quarter-end is two “sure things” that actually happened and six that didn’t. That’s actually a slight improvement from our first-quarter report, when only one sure thing actually came to pass. Keep in mind that if these were truly “sure things,” most, if not all, should have occurred. But there’s hope, as we still have two quarters to go. We’ll report back again after the third quarter.


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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