Swedroe: 2018 Good For Gurus
The 3Q update on the ‘sure things’ expected for 2018 by investment gurus has more bull’s-eyes than usual.
At the start of 2018, I compiled a list of predictions that gurus had made for the upcoming year, along with some items I heard frequently from investors, for a sort of consensus on the year’s “sure things.”
The turn of the calendar means it is now time for our third-quarter review. As is my practice, I will give a score of +1 for a forecast that appears to be true, a score of –1 for one that appears to be wrong, and a 0 for one that is basically a tie.
GDP Growing
Our first sure thing was that the U.S. economy would grow faster, with GDP growth forecasted at 2.5% for 2018. GDP increased at a 4.2% annual rate in the period April through June, and the latest estimate from the Federal Reserve Bank of Atlanta estimates the pace will continue at 4.1% for the third quarter And the Federal Reserve Bank of Philadelphia’s third-quarter Survey of Professional Forecasters has a full-year GDP growth forecast of 2.8%. We are on track to meet or exceed the 2.5% GDP growth rate, so I will score this +1.
Our second sure thing was that, given the expected fiscal stimulus from the Tax Cuts and Jobs Act of 2017, along with expectations for not only stronger economic growth but tighter labor markets, the Federal Reserve would continue to raise interest rates in 2018. Markets began the year expecting three rate hikes. That leads to the recommendation that investors should limit their bond holdings to the shortest maturities. The Fed has raised rates three times so far in 2018 and a fourth is now possible. The recommendation to stay short has been correct. The Vanguard Long-Term Treasury Index ETF (VGLT) returned –5.8% through the first nine months of 2018, underperforming the Vanguard Intermediate-Term Treasury Index ETF (VGIT), which returned –2.1% over that same period. The Vanguard Short-Term Treasury Index ETF (VGSH) outperformed both, returning 0.2% through September. Score: +1.
Our third sure thing was that tightening labor markets, stable and broader global growth, and a nadir in commodity prices would cause inflation to rise from cyclical lows. This, of course, ties into the second sure thing about rising rates and the recommendation to avoid term risk. The Consumer Price Index (CPI) increased 2.1% in 2017. There has not been any significant jump in the rate of CPI change so far this year, but the first eight months have shown a modest uptick in the cyclically adjusted rate each month. Score: 0.
Strengthening Economy
Our fourth sure thing was that, with help from tax cuts, the U.S. economy would pick up steam and corporate earnings would get a big boost. That leads to the recommendation that U.S. stocks are the place to be, outperforming international stocks. Through September, the Vanguard Russell 3000 ETF (VTHR) returned 10.2%, outperforming the Vanguard FTSE Developed Markets ETF (VEA), which returned -1.6% and the Vanguard FTSE Emerging Markets ETF (VWO), which returned –8.9%. Score: +1.
Our fifth sure thing follows from the fourth. With a strengthening U.S. economy and new tax cuts encouraging U.S. multinationals to repatriate earnings, the U.S. dollar would strengthen. The dollar index (DXY) ended 2017 at 92.1 and closed September at 95.3, a gain of 3.5%. Score: +1.
Our sixth sure thing was that stock market volatility would rise this year (which could test investor discipline). I’d note it’s hard to disagree with this one, as we began 2018 with the VIX at a record low of roughly 9. The VIX closed the third quarter at about 12. Score: +1.
Our seventh sure thing was that with U.S. stock valuations high, the place to be is in defensive funds, such as the iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL) or the Invesco Defensive Equity ETF (DEF). As previously noted, the Vanguard Russell 3000 ETF, VTHR, returned 10.2% through September 2018. QUAL returned 10.5%, and DEF returned 7.6%. We’ll call this a tie. Score: 0.
Our third-quarter 2018 score comes to five winners, zero losers and two draws. As the following table shows, if that rate holds up for the rest of the year, it will be the first time I’ve ended the year with a positive score.
I’ll again report back on the status of these “sure thing” predictions at the end of the year.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.
