At the start of 2018, I compiled a list of predictions that gurus had made for the upcoming year, along with some items that I heard frequently from investors, for a sort of consensus on the year’s “sure things.”
The turn of the calendar to 2019 means it is now time for our year-end review. As is my practice, I will give a score of +1 for a forecast that appears to be true, a score of -1 for one that appears to be wrong and a 0 for one that is basically a tie.
Our first sure thing was that the U.S. economy would grow faster, with GDP growth forecasted at 2.5% for 2018. GDP increased at a 3.4% annual rate in the third quarter, down from the 4.2% growth rate of the second quarter. The Federal Reserve Bank of Philadelphia’s fourth-quarter Survey of Professional Forecasters has a full-year GDP growth forecast of 2.9%. We are on track to meet or exceed the 2.5% GDP growth rate. Score: +1.
Our second sure thing was that, given the expected fiscal stimulus from the Tax Cuts and Jobs Act of 2017, along with expectations for not only stronger economic growth but tighter labor markets, the Federal Reserve would continue to raise interest rates in 2018. Markets began the year expecting three rate hikes.
That led to the recommendation that investors should limit their bond holdings to the shortest maturities. The Fed raised rates four times in 2018. The recommendation to stay short was correct. The Vanguard Long-Term Treasury Index ETF (VGLT) returned -1.5%, underperforming the Vanguard Intermediate-Term Treasury Index ETF (VGIT), which returned 1.4%. The Vanguard Short-Term Treasury Index ETF (VGSH) outperformed both, returning 1.6%. Score: +1.
Our third sure thing was that tightening labor markets, stable and broader global growth, and a nadir in commodity prices would cause inflation to rise from cyclical lows. The Consumer Price Index (CPI) increased 2.1% in 2017. The CPI rose just 1.9% in 2018. Score -1.
Our fourth sure thing was that, with help from tax cuts, the U.S. economy would pick up steam, and corporate earnings would get a big boost. That led to the recommendation that U.S. stocks were the place to be, and that they would outperform international stocks. The Vanguard Russell 3000 ETF (VTHR) lost 5.6% last year, outperforming the Vanguard FTSE Developed Markets ETF (VEA) and the Vanguard FTSE Emerging Markets ETF (VWO), which both lost 14.8%. Score: +1.
Our fifth sure thing followed from the fourth. With a strengthening U.S. economy and new tax cuts encouraging U.S. multinationals to repatriate earnings, the U.S. dollar would strengthen. The dollar index (DXY) ended 2017 at 92.1 and closed 2018 at 96.0, a gain of 3.9 percentage points. Score: +1.
Stock Market Expectations
Our sixth sure thing was that stock market volatility would rise this year (which could test investor discipline). I’d previously noted that it was hard to disagree with this one, as we began 2018 with the VIX at a record low of roughly 9. The VIX closed last year at about 25. Score: +1.
Our seventh sure thing was that, with U.S. stock valuations high, the place to be was in defensive funds, such as the iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL) or the Invesco Defensive Equity ETF (DEF). As previously noted, Vanguard’s Russell 3000 ETF, VTHR, lost 5.6% last year. QUAL lost 5.7% and DEF lost 3.9%. We’ll call this a tie. Score: 0.
Our final 2018 score comes to five winners, zero losers and two draws. As the following table shows, it’s the first time I’ve ended the year with a positive score, and also the first time I’ve had no false outcomes.
Later this week, I’ll cover 2019’s “sure things.”
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.