Swedroe: Gurus More Right Than Wrong In 3Q

October 07, 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.” I then keep track of whether these “sure thing” forecasts actually came to pass, through a series of periodic updates.

The inevitable turn of the calendar into October means that it’s time for our third-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’s basically a tie.

At the end of the first quarter, our score was +1/-7. The “sure things” fared a bit better by the end of the second quarter, with a score of +2/-6. However, equity markets around the globe had a difficult time in the third quarter, so perhaps the result is now different. With that in mind, we’ll begin our review.

Of Interest Rates And GDP

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 Sept. 30, Vanguard’s Short-Term Bond Index Fund (VBISX) returned 1.0 percent. The firm’s Intermediate-Term Bond Index Fund (VBIIX) returned 2.2 percent. 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, a lot of the economic news to date has reflected a weaker, not a stronger, economy. First-quarter growth clocked in at just 0.6 percent. Second-quarter growth came in stronger, at 3.9 percent. However, the most recent forecast for full-year growth in 2015 from the Federal Reserve Bank of Philadelphia’s survey now stands at just 2.3 percent, down from the forecast of 2.4 percent made during the second quarter. Score: -1.

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 has remained tepid, the dollar index rose to 96.3. Score: +1.

 

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