At the start of each year, I put together 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 to pass. This installment marks our third quarterly review of some consensus financial predictions that pundits forecast as certain to occur in 2014.
It's important to note that if the following predictions were actually sure things, all -- or at least most -- of them should have happened. But as the research indicates, the past isn't prologue, and there simply are no good forecasters when it comes to predicting 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 was basically a tie.
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 only the shortest maturities. Vanguard's Short-Term Bond Index Fund (VBISX) returned 0.8 percent, but its Intermediate-Term Bond Index Fund (VBIIX) returned 4.9 percent, and its Long-Term Bond Index Fund (VBLTX) returned 13.4 percent. Score: -1
The second sure thing follows closely from the first. With the Fed finally tightening monetary policy, and the rise in interest rates predicted to follow it, emerging markets equities would perform poorly. So far this year, Vanguard's Emerging Markets Index Fund (VEIEX) returned 4.3 percent, underperforming the 8.2 percent return of Vanguard's 500 Index Fund (VFINX). While returns from VEIEX have not matched the returns from the domestic stock index in this example, they also haven't done poorly. With that said, we'll call this one a draw. Score: 0
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 the VFINX returned 8.2 percent through Sept. 30, outperforming cash and safe short-term bonds. And while Vanguard's Small Cap Index Fund (NAESX) returned just 0.2 percent and Vanguard's Small Cap Value Fund (VISVX) returned just 2.4 percent, Vanguard's Large Value Index Fund (VIVAX) returned a much better 8 percent, and Vanguard's REIT Index Fund (VGSIX) returned 13.9 percent. It turns out that all but NAESX outperformed what we can consider a "cash alternative," VBISX. Score: -1
The fourth sure thing is that, with continuing monetary stimulus being injected into the economy, we should see a sharp rise in inflation. In the latest Consumer Price Index (CPI) report, released in September, the Consumer Price Index for All Urban Consumers (CPI-U) fell 0.2 percent in August on a seasonally adjusted basis. Over the first eight months of this year, in only three months was the increase as high as 0.3 percent. May's increase of 0.4 percent was the highest. And since May, the rate of increase has been declining. June and July showed increases of 0.3 percent and 0.1 percent, respectively. Score: -1
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 end of September at 86.05. Score: -1
Again, 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 third quarter at a very close $1,208. We'll call this a draw. Score: 0
The seventh sure thing is that the municipal bond market would feel both interest rate increases and default problems, keeping investors away. We've seen neither rate increases nor defaults. Vanguard's Short-Term Tax Exempt Fund (VWSTX) returned 0.6 percent, its Intermediate-Term Tax Exempt Fund (VWITX) returned 6 percent and its Long-Term Tax Exempt Fund (VWLTX) returned 9.2 percent over the first nine months of this year. 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. The revised first-quarter figures indicate that GDP fell 2.1 percent. However, the September revision to the second-quarter growth rate raised the estimate to a positive 4.6 percent. Despite the strong snap-back, we'll call this an accurate forecast. Score: +1
The ninth sure thing is that, after defying the gurus in 2013, market volatility will rise. The VIX -- Wall Street's so-called fear gauge -- ended 2013 at 13.72. The VIX closed the first quarter slightly higher at 13.88, but it decreased significantly to close the second quarter at 11.57 after falling steadily for most of May and June. And it remained steady into early September. However, the month's last three weeks saw an increase in volatility. The VIX closed the third quarter at 16.7. We'll call this one a draw. Score: 0
Our tenth and final sure thing is that active management will beat passive management in net returns. Despite an overwhelming amount of academic research to the contrary, an astonishing 75 percent of advisors believed this to be true, according to an InvestmentNews report from January 2014. We'll have to wait for Standard & Poor's annual S&P Indices Versus Active (SPIVA) report to officially score on this one. However, we do know there's really no such thing as a stock-picker's year. And the mid-year SPIVA report showed that for the 12-month period ending June 30, 60 percent of large-cap managers, 58 percent of mid-cap managers and 73 percent of small-cap managers underperformed their benchmarks. With those figures in mind, I feel pretty comfortable calling this one early. Score: -1.
Our third-quarter total score came in at -5. So far, it's pretty apparent that even the sure things haven't turned out to be sure. 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.