The Prevailing Investment Angst

“What should I do since the market is so high right now?” “It can’t continue to go up, it’s going down, right?” These questions represent the prevailing investment angst. This is where professional investment advice can be most valuable. We have to invest without knowing the answer to these questions. The short-term direction of the stock market cannot be predicted – this is true despite the constant barrage of predictions being made every day on the financial news.

The financial experts know a lot more about the markets and how the markets will perform in the future than the ordinary rest of us. Right? No!

As it turns out, the predictions made by financial experts are no better than those made by gypsies looking into crystal balls, soothsayers gazing at the entrails of a sacrificed animal or wizards with tall caps who gaze into space. In fact, the financial experts might even be LESS reliable than those other charlatans.

Somebody has been keeping a scorecard about these predictions, the prevailing truths espoused as a general consensus. Larry Swedroe, an economist and director of research for Buckingham Strategic Wealth, has kept records since 2010 and spent much of 2017 compiling predictions that were made with a great deal of certainty, and recently gave what might be called a “guru scorecard” of results. Here are six “sure things” that were predicted at the beginning of 2017 and how they actually turned out.

One popular prediction was that bond rates would rise dramatically in 2017, causing bond investors to book significant losses. Actual result: Bonds performed well in 2017, with long-term rates topping short-term rates even in the high credit quality portion of the market. This prediction is a fail.

The second consensus prediction was that inflation will rise significantly This prediction also didn’t happen in 2017. On Dec. 13, 2017, the BLS reported that the CPI for all Urban Consumers increased .4%, for all items rose 2.2%, and for all items less food and energy, was 1.7% – not significantly higher than last year.

The third prediction was a win: the growth rate of real GDP was predicted to improve from 1.6% in 2016 to 2.2% in 2017. The recent full-year forecast released Nov. 13, 2017 from the Federal Reserve Bank of Philadelphia is for real GDP growth of 2.2% in 2017.

Fourth, it was generally agreed that with the Fed tightening monetary policy and our economy improving faster than the economies of European and other developed nations and their central banks still pursuing the opposite easing monetary policies, that the dollar would strengthen. The dollar index (DXY) ended 2016 at 102.38 and ended 2017 at 92.3. Another prediction fail.

Fifth, with the political climate increasing concern over the potential for trade wars, it was generally espoused that investors should avoid emerging markets. Investors acting on these predictions would have lost out on significant returns. The Vanguard FTSE Emerging Markets ETF (VWO) returned 31.5% and Dimensional Fund Advisors Emerging Markets Core Fund (DFCEX) returned 36.55% in 2017. Fail.

The sixth prevailing consensus opinion was that, with the Shiller cyclically adjusted price-to-earnings (CAPD) ratio at 27.7 (66% above its long-term average), domestic stocks were overvalued. Compounding the issue with valuations, the reasoning goes, is that rising interest rates make bonds more competitive with stocks. Thus, it was predicted that U.S. stocks would be likely to have mediocre returns in 2017. A group of 15 Wall Street strategists called for the expected the S&P 500 to provide a total return of about 7%. The Vanguard 500 Index Fund, a proxy for the S&P 500, returned 21.67% in 2017. Prediction fail.

Seventh, was a prediction that, given their relative valuations, U.S. small-cap stocks would underperform large-cap stocks in 2017. Morningstar data showed that at the end of 2016, the prospective price-to-earnings (P/E) ratio of the Vanguard Small-Cap ETF (VB) stood at 21.4 while the P/E of the Vanguard S&P ETF (VOO) stood at 19.4. VOO returned 21.8% outperforming VB, which returned 16.3%. This prediction became true.

The last consensus prediction tracked by Swedrow was that, with non-US developed and emerging market economies generally growing at a slower pace than the US economy, with weak commodity prices, slower growth in China’s economy and the Fed tightening monetary policy and a rising dollar, that international developed market stocks would underperform U.S. stocks in 2017. This prediction did not bear out. The Vangueard FTSE Developed Markets ETF (VEA) returned 26.4%, outperforming VOO which we already noted returned 21.8%.

In all, the 2017 Scorecard resulted in only 2 out of 8 consensus predictions coming true. Imagine the disastrous investment program and individual would experience by taking action on all of these so-called “Expert Opinions.” Indeed, since 2010 when the Prediction Scorecard was started, the results have been consistently dismal. Of 62 significant predictions tracked over the past eight years, 43 turned out to be wrong.

All of this is worth remembering next time you hear a pundit or market guru make a confident prediction about what’s going to happen in the markets. Based on past history, you could have done better if you’d relied instead on a gypsy fortune teller.

The market is and will continue to be unpredictable. We have to live with this fact. And… we have to maintain an investment strategy designed to fulfill future goals. To counteract all of the misinformation and false predictions, maintaining a statistics-based, diversified investment strategy is the best defense.

Note: http://www.etf.com/sections/index-investor-corner/swedroe-20