Swedroe: Forecast Follies, 2015 Edition

January 12, 2015

I like to keep track of the financial forecasts people make for an upcoming year, especially the ones that gain consensus as “sure things.” Sometimes it seems like too few are willing to hold the financial media—or the “gurus” who appear in it—accountable for their predictions, which is a shame.


The critical point to remember, as an investor, is that an overwhelming amount of academic, peer-reviewed evidence clearly demonstrates there are no good forecasters.


A “sure thing” can make my list either because one of the proverbial “gurus” is making the forecast or because I’ve repeatedly been asked to address the issue or concern by clients or by my fellow advisors. We keep track of whether the events “sure” to occur each year actually have come to pass through a review at the end of each quarter. Here’s my list of sure things I’ve been hearing for 2015.


No. 1: Rising Rates

Advisor magazine carried this warning: “U.S. Bond Sentiment Worst Since Disastrous ’09.” The expectation for rising interest rates has led pundits to recommend that investors limit their bond holdings to the shortest maturities this year. 


No. 2: Accelerating Growth

The second sure thing is that economic growth, while remaining relatively tepid, will still improve a bit. The Philadelphia Federal Reserve’s Survey of Professional Forecasters predicts unremarkable GDP growth of 3.0 percent in 2015.


No. 3: Stronger Dollar

Our third sure thing follows from the first two. With the Federal Reserve now tightening monetary policy and the economy improving, the dollar will strengthen. The dollar index ended 2014 at 90.64.      


No. 4: Avoid Stocks

The fourth sure thing is that, with the Shiller CAPE 10 (cyclically adjusted price-earnings ratio) at 27.0 as we entered the year—about 70 percent above its long-term mean —stocks should be avoided.


No. 5: Beware Small Stocks

The fifth sure thing is that because U.S. small-cap stocks are even more highly valued than U.S. large-cap stocks, they will underperform this year. According to data from Morningstar, the Vanguard S&P 500 ETF (VOO | A-97) had a forward-looking price-to-earnings (P/E) ratio of 18. The Vanguard Small Cap ETF (VB | A-99) had an even higher forward-looking P/E ratio of 20.



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