Swedroe: Q1 2019 ‘Sure Things’ Review

April 15, 2019

At the start of 2019, I compiled a list of predictions that gurus had made for the upcoming year, along with some items I heard frequently from investors, for a sort of consensus on the year’s “sure things.”

The turn of the calendar means it is now time for our first quarter review. As is my practice, I will give a score of +1 for a forecast that came true, a score of -1 for one that was wrong, and a 0 for one that was basically a tie.

Expectations Of Strength

The first sure thing was that U.S. economic growth would continue to be strong, slowing just slightly from about 3% to 2.7%. While we don’t have any official figures yet, the Philadelphia Federal Reserve’s First Quarter 2019 Survey of Professional Forecasters, released March 22, 2019, now projects first quarter GNP growth of just 1.5% and full-year growth of just 2.4%. Given that growth now looks to have slowed more than expected, we’ll score this -1.

The second sure thing was that corporate profit growth would continue to be strong, with Morgan Stanley predicting S&P 500 companies’ earnings would reach a cumulative $178 a share, an increase of about 8%. With the weaker-than-expected economy and trade-war-related issues, the latest (March 28) consensus of analysts’ estimates for S&P 500 operating earnings per share have been lowered to about $162. Score: -1.

The third sure thing was that the U.S. stock market would have a strong year. Bloomberg gathered 14 forecasts for 2019 from the firms it tracks, and the average prediction was for the S&P 500 Index to rise to 3,056 by year-end. Fueling the strong forecast was that, based on forecasted earnings, valuations had fallen to the cheapest levels since 2006—the forward-looking price-to-earnings (P/E) ratio is only about 15. Mike Wilson at Morgan Stanley was the least bullish, with a target of 2,750. The S&P 500 Index closed the first quarter at 2,834, and the SPDR S&P 500 ETF (SPY) provided a total return of 13.6%. Score: +1.

The fourth sure thing was that, with economic growth moderating, inflation would remain tame. The consensus forecast of professional economists was for the CPI to increase by just 2.3%. The market certainly agreed, as the spread between 10-year TIPS and 10-year nominal Treasury bonds was only about 1.9 percentage points. The first three months of 2019 produced increases of 0.0%, 0.2%, 0.4%, respectively, or an average of 0.2% per month, right in line with the full-year forecast. Score: +1.

Extending Maturities

The fifth sure thing was that, with slowing economic growth and tame inflation, it would be safe to extend maturities. Futures markets showed a 91% probability of no rate increases in 2019 by the Federal Reserve. Thus, longer-term bonds would outperform. In the first quarter, the Vanguard Long-Term Treasury Index ETF (VGLT) returned 4.6%, outperforming the Schwab Intermediate-Term U.S. Treasury ETF (SCHR), which returned 2.0%, and the Schwab Short-Term U.S. Treasury ETF (SCHO), which returned 1.0%. Score: +1.

The sixth sure thing was that, with the Federal Reserve lowering expectations for further rate increases (the market then expected only one rate increase in 2019) and the European Central Bank beginning to unwind its easy monetary policy (having ended its bond-buying program and expected to begin to raise interest rates in the second half of 2019), the dollar would weaken versus the euro. The U.S. Dollar Index (DXY) closed 2018 at 96.2 and rose to 97.3 at the end of the first quarter. Score: -1.  

The seventh sure thing was that concerns over massive budget deficits combined with the weaker outlook for the dollar would lead to gold putting in a strong performance. Gold closed 2018 at $1,282. It finished the first quarter at $1,291, an increase of about 0.7%. Given that riskless one-month Treasury bills returned 0.6%, it’s hard to say that’s a strong performance. As such, we’ll score that a -1.    

The eighth sure thing was that, with continued uncertainty over the risk of trade war, the problem of Brexit, and the standoff between the European Central Bank and the Italian government over the Italian budget deficit (among other geopolitical problems), volatility will remain high. The VIX ended 2018 at 25.42 and finished the first quarter at just 13.7. Score: -1.

Our first quarter 2019 score comes to three winners and four losers, a net score of -1. I’ll report back at the end of the second quarter.

And here’s the historical evidence on my list of sure things:

 

Year Number of Sure Things Yes/True (+) No/False (-) Tie/Draw Net Score
2018 7 5 1 1 +5
2017 8 2 6 0 -4
2016 8 2 6 0 -4
2015 8 3 4 1 -1
2014 10 3 7 0 -4
2013 7 2 5 0 -3
2012 8 3 4 1 -1
2011 8 1 7 0 -6
2010 5 1 4 0 -3
Total (%) 69 22 (32%) 44 (64%) 3 (4%) -21

 

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.

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