Swedroe: ‘Sure Things’ To Come (Maybe)

Every January, I start keeping track of what I hear in the financial media and from investors in terms of predictions for the upcoming year. Today we’ll look at a list of some common “sure thing” forecasts I’ve been hearing for 2018.

Expectations For The Fed & More

Our first sure thing is that the U.S. economy will grow faster, with GDP growth in 2018 estimated at 2.5%. That’s according to the most recent forecast released at the Federal Open Market Committee meeting in December 2017. That’s also consistent with the fourth-quarter 2017 survey of professional economists put out by the Federal Reserve Bank of Philadelphia.

Our second sure thing is that, given the expected fiscal stimulus from the recently passed tax reform bill, along with expectations not only for stronger economic growth but for tighter labor markets, the Federal Reserve will continue to raise interest rates in 2018—the market expects three rate hikes. That leads to the recommendation that investors limit their bond holdings to the shortest maturities.

Our third sure thing is that, with the tightening in labor markets, stable and broader global economic growth, and a nadir in commodity prices, inflation will rise in 2018 from cyclical lows. This prediction ties into our second sure thing about rising interest rates and the recommendation to avoid term risk.

Dollar, Economy To Strengthen

Our fourth sure thing is that, with help from cuts in the tax bill, the U.S. economy will pick up steam and corporate earnings this year will get a large boost. This, in turn, leads to the prediction that U.S. stocks are the place to be, and that they will outperform international stocks.

Our fifth sure thing follows from the fourth. With a strengthening U.S. economy and the tax bill encouraging U.S. multinationals to repatriate earnings, the U.S. dollar will strengthen.

Our sixth sure thing is that stock market volatility will rise this year (which could provide a test of investor discipline). I’d note that it’s hard to disagree with this one, as we began 2018 with the VIX at a record low of about 9.

Our seventh sure thing is that, with U.S. equity valuations high, defensive funds, such as the iShares Edge MSCI USA Quality Factor ETF (QUAL) or the Guggenheim Defensive Equity ETF (DEF), are the better position to take.

That’s my list. Keep in mind that, if these predictions really are “sure things,” most (if not all) should happen. We’ll report back to you with a score at the end of each quarter.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.