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
No. 4: Avoid Stocks
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.
No. 7: International Underperformance
The sixth sure thing is that with the non-U.S. developed-market economies teetering on recession and emerging markets hurt by falling commodity prices, the Fed’s tightening of monetary policy and a rising dollar, international stocks will continue to underperform U.S. stocks in 2015.
No. 7: Gold Rally
The seventh sure thing is that gold will rally, benefiting from global geopolitical and economic concerns, as well as the monetary stimulus provided by the world’s central banks over the past six years. For example, CNBC personality Marc Faber, who is known as “Dr. Doom,” predicts that gold prices might rise to $3,648 by 2018 and to $7,829 by 2023, driven by money supply and the monetary base. Don’t you just love that precision? Gold ended 2014 at $1,184.
No. 8: Rising Volatility
The eighth sure thing is that, after defying the gurus in 2014, the volatility of the market will rise this year. For example, BlackRock Global Chief Investment Strategist Russ Koesterich predicted that plunging oil prices, a temperamental Russia and fewer accommodative U.S. monetary conditions will drive volatility higher in 2015. The VIX ended 2014 at 19.2.
No. 9: Go Active
Our ninth and final sure thing is that active management will beat passive management in net returns. A 2014 Investment News survey of professional financial advisors found that, despite all the evidence to the contrary, an astonishing 75 percent believed that active management would outperform.
As regular readers of my articles know, I don’t usually make forecasts. In fact, the historical evidence is conclusive that there are no good economic or market forecasters.
That said, I’m willing to stick my neck out and make two forecasts here. My willingness to do so is based on novelist Victor Hugo’s belief that “there is one thing stronger than all the armies of the world, and that is an idea whose time has come.”
With these thoughts and Victor Hugo’s ideas in mind, my two “sure things” are:
- Actively managed funds will continue to lose market share to index funds and exchange-traded funds.
- Broker-dealers will lose market share to registered investment advisors who provide a fiduciary standard of care.
Investors have grown tired of the poor and inconsistent outcomes delivered by actively managed funds, and they want a better alignment between their interests and the interests of their advisors. In other words, the only thing they want their investment advisors to be selling them is advice, and they want to ensure that this advice is solely in their interests.
That’s our list. Keep in mind that if they are “sure things,” most—if not all—should happen. We’ll report back to you at the end of each 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.