Swedroe: Scoring 2015’s ‘Sure Things’

January 11, 2016

The fourth sure thing was that—with the cyclically adjusted price-to-earnings (CAPE) ratio at about 27.5 as we entered 2015, roughly 70% above its long-term average—stocks would best be avoided. In 2015, Vanguard’s Total [U.S.] Stock Market Index Fund (VTSMX) returned 0.3%. VTSMX outperformed cash sitting on the sidelines waiting for a bear market, but underperformed Vanguard’s Short-Term Bond Index Fund (VBISX), which returned 0.9%. We’ll call that a draw. Score: 0.

Experts Get Small-Cap Performance Right

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 3.8% in 2015 and underperformed VFINX, which returned 1.3%. Score: +1.

The sixth sure thing was that—with the non-U.S. developed-market economies teetering on recession and emerging markets hurt by falling commodity prices, the Fed’s tightening and a rising dollar—international stocks would underperform U.S. stocks last year. In 2015, Vanguard’s Total International Stock Fund (VGTSX) lost 4.4% and underperformed its U.S. counterpart, Vanguard’s Total [U.S.] Stock Market Index Fund (VTSMX), which gained 0.3%. Score: +1.

The seventh sure thing was that gold would rally, benefiting from global geopolitical and economic concerns in addition to 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 political crises around the globe last year, gold closed 2015 at $1,060, down about 10.5%. Score: -1.

The eighth sure thing was that, after defying the gurus in 2014, the volatility of the market would rise. The VIX ended 2014 at 19.2. With the exception of a period in the third quarter of 2015, the VIX spent most of last year below that level. In fact, until mid-August, there were only seven days when it was above 20. It finished the year at 18.2. Score: -1.

This is the sixth year we’ve been keeping track of “sure things,” and we’ve yet to have one in which at least half have come true. Our final tally for 2015 is that three of the eight “sure things” actually happened. While a batting average of .375 would be great for a baseball player, a .375 free-throw shooting percentage would be awful. And I wouldn’t consider it very good here given that these predictions were “sure things.”

Keep in mind that if they really were “sure things,” all of them should have occurred. Note that if we consider the one draw (the score of 0) a bunt or a sacrifice fly, the batting average would improve to .428. That also would be great for a baseball player, terrible for a basketball player and still poor for a “sure thing.”


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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