Swedroe: Gurus More Right Than Wrong In 3Q

October 07, 2015

Getting It Right With Stocks

The fourth sure thing was that—with the cyclically adjusted price-to-earnings (CAPE) ratio at about 27.5 as we entered the year, roughly 70 percent above its long-term average—stocks would best be avoided. Through the end of the third quarter, Vanguard’s Total [U.S.] Stock Market Index Fund (VTSMX) returned negative 5.6 percent. VTSMX underperformed both cash sitting on the sidelines waiting for a bear market and Vanguard’s Short-Term Bond Index Fund. Score: +1.

The fifth sure thing was that, given relative valuations, U.S. small stocks would underperform U.S. large stocks. Morningstar data showed the price-to-earnings (P/E) ratio of Vanguard’s Small Cap Index Fund (NAESX) stood at about 20, while the P/E ratio of the Vanguard 500 Index Fund (VFINX) stood at roughly 18. NAESX lost 6.7 percent through the third quarter and underperformed VFINX, which returned 5.4 percent. Score: +1.

The sixth sure thing was that—with the non-U.S. developed-market economies teetering on recession and emerging markets hurt by failing commodity prices, the Fed’s tightening, and a rising dollar—international stocks would underperform U.S. stocks this year. The Total International Stock Fund (VGTSX) from Vanguard lost 6.9 percent and underperformed its U.S. counterpart, (VTSMX), which lost 5.6 percent. Score: +1.

The seventh sure thing was that gold would rally, benefiting from global geopolitical and economic concerns in addition to all the monetary stimulus provided by the world’s central banks over the past six years. Gold closed 2014 at $1,184. Despite the various economic and geopolitical crises around the globe so far this year, gold closed the third quarter at $1,114, down about 6 percentage points. Score: -1.

The eighth sure thing was that, after defying the gurus in 2014, the volatility of the market would rise. The VIX ended last year at 19.2. Recent market volatility, both at home and abroad, led the VIX to close the third quarter at 24.5. Score: +1.

Our final tally at quarter-end shows five “sure things” that actually happened and three that didn’t. A 62.5 percent accuracy rate is as good a score as I can recall in my six years of tracking these predictions. Keep in mind that if they were truly “sure things,” all of them should have occurred. However, we do still have another quarter to go. We’ll report back again 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.


Find your next ETF

Reset All