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BAM Intelligence

10 “sure things” for 2014: Not so much

At the beginning of each year, I compile a list of predictions that financial gurus and industry experts tell us are a “sure thing.” And each year, I track how many of these predictions actually come true. So, it’s now time for our second quarterly review of 10 financial predictions that pundits forecast as certain to occur in 2014.

Keep in mind that if these 10 predictions were really sure things, all — or at least most — of them should have happened. But as the research indicates, past isn’t prologue, and no one is a good forecaster when it comes to performance. As is our practice, we give a score of +1 for a forecast that came true, a -1 for a prediction that turned out to be wrong, and a 0 for one that’s basically a toss-up.

Our first sure thing is that, with the Fed announcing its plan to end quantitative easing, interest rates will rise. Thus, investors should and would limit bond holdings to the shortest maturities. Vanguard’s Short-Term Bond Index Fund (VBISX) returned 0.93 percent, but its Intermediate-Term Bond Index Fund (VBIIX) returned 4.92 percent and its Long-Term Bond Index Fund (VBLTX) returned 12.04 percent. Score: -1

The second sure thing follows from the first. With the Fed finally tapering, and the predicted following rise in interest rates, emerging market equities would perform poorly. Vanguard’s Emerging Markets Index Fund (VEIEX) returned 6.94 percent, underperforming the 7.05 percent return of Vanguard’s 500 Index Fund (VFINX) by just 0.11 percentage points.

It’s worth noting that the difference in returns between the emerging markets index and domestic large-cap index compared here narrowed to those 0.11 percentage points at the end of the second quarter from 2.2 percentage points at the end of the first quarter, when the VEIEX posted returns of -0.4 percent. While returns from the VEIEX have yet to fully catch returns from the domestic stock index in this example, they’re already closing in, and it’s only halfway through the year. Foreign and domestic equities are performing closely enough at this point time for us to call this forecast untrue. Score: -1

The third sure thing is that with the cyclically adjusted price-earnings ratio (CAPE) at 26.17 as we entered 2014, about 60 percent above its long-term average, stocks should be avoided. But as mentioned, VFINX returned 7.05 percent as of June 30, far outpacing its own first-quarter return of 1.76 percent and again outperforming cash and safe short-term bonds. Vanguard’s Small Cap Index Fund (NAESX) returned a healthy 6.38 percent, while Vanguard’s Large Value Index Fund (VIVAX), which returned 7.16 percent, and Vanguard’s Small Cap Value Fund (VISVX), which returned 8.29 percent, finished the quarter by turning in even stronger performances. Score: -1

The fourth sure thing is that, with continuing fiscal and monetary stimulus being injected into the economy, we should see a sharp rise in inflation. In the last Consumer Price Index (CPI) report, released in June, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in May on a seasonally adjusted basis. The first four months showed increases of just 0.1 percent, 0.1 percent, 0.2 percent, and 0.3 percent, respectively. While inflation has picked up a bit, we haven’t seen the sharp rise that was predicted. However, given the recent uptick, we’ll be generous. Until there’s more information, I’ll call this one a draw. Score: 0

The fifth sure thing follows from the fourth. It’s that rising inflation should lead to a falling dollar. The dollar index closed 2013 at 80.29. It finished the first quarter at a virtually unchanged 80.28, and it closed the second quarter at a close 79.83. In addition, June 30 was the first time the index’s low dipped under 80 since May 21, where it has been hovering all year. Score: -1

The sixth sure thing follows from the fourth and fifth. It’s that gold should reverse the sharp fall it has experienced recently. Gold closed 2013 at $1,204.50. It ended the second quarter at $1,322.30. Score: +1

The seventh sure thing is that the municipal bond market should be hit both by interest rate increases and default problems, keeping investors away. We’ve seen neither rate increases nor default problems. Vanguard’s Short-Term Tax Exempt Fund (VWSTX) returned 0.49 percent, its Intermediate-Term Tax Exempt Fund (VWITX) returned 4.68 percent and its Long-Term Tax Exempt Fund (VWLTX) returned 7.16 percent. Score: -1

The eighth sure thing is that economic recovery will continue down its tepid path. The Philadelphia Federal Reserve’s Survey of Professional Forecasters predicted GDP growth of 2.6 percent in 2014. However, revised first-quarter GDP figures released in June came in at -2.9 percent. That’s the worst first quarter for GDP since 2009. The plunge in the first-quarter data should also reverse, to some degree, a positive reading of GDP in the second quarter. Score: +1

The ninth sure thing is that, after defying the gurus in 2013, market volatility will rise. The VIX ended 2013 at 13.72. While it closed the first quarter slightly higher, at 13.88, it decreased significantly to close the second quarter at 11.57 after falling steadily for most of May and June. Score: -1

Our tenth and final sure thing is that active management will beat passive management in net returns. Despite an overwhelming amount of research to the contrary, 75 percent of advisors believed this to be true, according to an InvestmentNews report from January 2014. Technically, we’ll have to wait for the annual SPIVA report to give a score on this one. We know, however, that there’s really no such thing as a stock-picker’s year.

Our total second-quarter score came in at -4, compared with a total first-quarter score of -3. Both scores exclude our 10th “sure thing,” which we’ll collect data on at year-end.

So far, it’s pretty apparent that even the sure things haven’t turned out so sure at all. Keep this in mind the next time you’re tempted to give credence to some guru’s forecast, and instead plan for the long-term.

This commentary originally appeared July 15 on CBSNews.com

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2014, The BAM ALLIANCE

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Larry Swedroe

Chief Research Officer

Larry Swedroe is Chief Research Officer for the BAM ALLIANCE.

Previously, Larry was vice chairman of Prudential Home Mortgage. Larry holds an MBA in finance and investment from NYU, and a bachelor’s degree in finance from Baruch College.

To help inform investors about the evidence-based investing approach, he was among the first authors to publish a book that explained evidence-based investing in layman’s terms — The Only Guide to a Winning Investment Strategy You’ll Ever Need. He has authored 15 more books:

What Wall Street Doesn’t Want You to Know (2001)
Rational Investing in Irrational Times (2002)
The Successful Investor Today (2003)
Wise Investing Made Simple (2007)
Wise Investing Made Simpler (2010)
The Quest for Alpha (2011)
Think, Act and Invest Like Warren Buffett (2012)
The Incredible Shrinking Alpha (2015)
Your Complete Guide to Factor-Based Investing (2016)
Reducing the Risk of Black Swans (2018)
Your Complete Guide to a Successful & Secure Retirement (2019)

He also co-authored four books: The Only Guide to a Winning Bond Strategy You’ll Ever Need (2006), The Only Guide to Alternative Investments You’ll Ever Need (2008), The Only Guide You’ll Ever Need for the Right Financial Plan (2010) and Investment Mistakes Even Smart Investors Make and How to Avoid Them (2012). Larry also writes blogs for MutualFunds.com and Index Investor Corner on ETF.com.

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