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.

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.



 

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