Swedroe: Following Up On 2017’s ‘Sure Things’

At the start of each year, I put together a list of predictions gurus make for the upcoming year—sort of a consensus of “sure things.” We keep track of the sure things with a review at the end of each quarter.

With March behind us, it’s time for our first review. As is our practice, we give a positive score for a forecast that came true, a negative score for one that was wrong and a zero for one that was basically a tie.

The Predictions
Here, then, are the first-quarter results. Each sure thing is followed by what actually happened, and the score.

1. The Federal Reserve will continue to raise interest rates in 2017. That leads many to recommend that investors limit their bond holdings to the shortest maturities. Economist Jeremy Siegel even warned that bonds are “dangerous.” On March 15, 2017, the Federal Reserve did raise interest rates by 0.25%. However, despite the prediction of rising rates actually occurring, through March 31, 2017, the Vanguard Long-Term Bond ETF (BLV) returned 1.78%, outperforming its Short-Term Bond ETF (BSV), which returned 0.56%; and its Intermediate-Term Bond ETF (BIV), which returned 1.26%. Score -1.
2. Given the large amount of fiscal and monetary stimulus we have experienced and the anticipation of a large infrastructure spending program, the inflation rate will rise significantly. On March 15, 2017, the Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers increased 0.1% in February on a seasonally adjusted basis. It also reported that the index for all items less food and energy rose 2.2% over the last 12 months; this was the 15^th-straight month the 12-month change remained in the range of 2.1-2.3%. The February increase was the smallest one-month rise in the seasonally adjusted all-items index since July 2016. However, in January, the index rose 0.6%, and the all-items index rose 2.7% for the 12 months ending February; the 12-month increase has been trending upward since a July 2016 trough of 0.8%. We’ll call this one a draw. Score 0.
3. With the aforementioned stimulus, anticipated tax cuts and a reduction in regulatory burdens, the growth rate of real GNP will accelerate, reaching 2.2% this year. We’ll have to wait to get the first quarter figures to make a call on this one. Score 0.
4. 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 their central banks still pursuing very easy monetary policies—the dollar will strengthen. The U.S. Dollar Index (DXY) ended 2016 at 102.38. The index closed the first quarter at 100.35. Score -1.
5. With concern mounting over the potential for trade wars, emerging markets should be avoided. Despite those mounting concerns, through March 31, 2017, the Vanguard FTSE Emerging Markets ETF (VWO) returned 10.87%, outperforming the S&P 500 Index, which returned 6.07%. Score -1.
6. With the Shiller cyclically adjusted price-to-earnings ratio at 27.7 as we entered the year (66% above its long-term average), domestic stocks are overvalued. Compounding the issue with valuations is that rising interest rates make bonds more competitive with stocks. Thus, U.S. stocks are likely to have mediocre returns in 2017. A group of 15 Wall Street strategists expect the S&P 500, on average, to close the year at 2,356. That’s good for a total return of about 7%. As noted above, the S&P 500 Index returned 6.07% in the first quarter. Score -1.
7. Given their relative valuations, U.S. small-cap stocks will underperform U.S. large-cap stocks this year. Morningstar data shows that at the end of 2016, the prospective price-to-earnings (P/E) ratio of the Vanguard Small-Cap ETF (VB) stood at 21.4, while the P/E ratio of the Vanguard S&P 500 Index ETF (VOO) stood at 19.4. Through March 31, 2017, VB returned 3.74%, underperforming VOO, which returned 6.05%. Score +1.
8. With non-U.S. developed and emerging market economies generally growing at a slower pace than the U.S. economy (and with many emerging markets hurt by weak commodity prices, slower growth in China’s economy, the Federal Reserve tightening monetary policy and a rising dollar), international developed-market stocks will underperform U.S. stocks this year. Through March 31, 2017, the Vanguard FTSE Developed Markets ETF (VEA) returned 7.81%, outperforming VOO, which returned 6.05%. Score -1.

Analysis Of Results

Our final tally shows that five sure things failed to occur, while just one sure thing actually happened. We also had one draw and one too early to call. We’ll report again at the end of the second quarter.

The table shows the historical record since I began this series in 2010: 

Only about 25% of sure things actually occurred. Keep these results in mind the next time you hear a guru’s forecast.

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