The Track Record of Stock Market Experts
Every year well known industry commentator Larry Swedroe, Principal at US wealth management firm Buckingham Strategic Wealth, assesses the hits and misses of market pundits who predict the year’s “sure things”. He scores +1 for a true forecast, -1 for a wrong prediction and 0 for a draw. Below are the “sure things” that were heard from investors and stock market experts in 2017. We use the US, the world’s largest economy and stock market, as the measure of successful predictions.
1. Bonds, rising interest rates and inflation – the deadly cocktail
Given that interest rates were due to rise from very low levels, most investors suggested limiting bond holdings to the shortest duration. As flagged, the Federal Reserve raised interest rates 0.75% over 2017. However, as evidenced by index led ETF bond strategies, the predicted outcome of the rate rises in the States did not come to pass – the Vanguard Long-Term Treasury Index ETF (VGLT) returned 8.6%, the intermediate version (VGIT) returned 1.7% and the Short term Treasury Index (VGIT) 0.0%.
Alongside the prediction of the impact of rising rates, experts were forecasting the return of inflation in the US due to infrastructure spend, wage growth and fiscal stimulus. Inflation erodes the real return of your bond coupons. Again, using the US as an example, the Bureau of Labor Statistics data showed inflation only nudging upwards.
2. GDP boost
Given the above mentioned stimulus people believed GDP would grow. This happened.
With an improving US economy combined with loose monetary policy in Europe and elsewhere, the dollar would strengthen. The dollar index ended 2016 at 102.38. The index closed 2017 at 92.30.
With a strengthening dollar emerging markets would struggle as the commodities they produce become more expensive to their customers and their national debt (often held in USD) becomes more expensive to service. The Vanguard FTSE Emerging Market ETF (VWO) returned 31.5%. Emerging markets were the strongest asset class in the MASECO strategic asset allocation in 2017.
Given that the US was growing at a faster pace than non-US developed markets, international stock markets would continue to underperform the US in 2017. The Vanguard FTSE Developed Markets ETF (VEA) returned 26.4% versus the vanguard S&P500 ETF (VOO) at 21.8%.
3. Small Caps underperform
Small company valuations were very high in 2017 and many predicted that they would underperform the cheaper large caps. This happened.
So, 2017 proved a resounding “Miss” for stock market experts. Swedroe has conducted this survey since 2010. Out of 62 “sure things” in the series, only 17 came true, 43 turned out to be false and 2 were a draw! Over the last 8 years since 2010 just over 25% have come true – not a great hit rate for the talking heads!
What are the “sure things” people are predicting this year? Remember that when you hear the forecasts of “sure things”, they can often prove to be anything but.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest. Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is an SEC Registered Investment Adviser in the USA. MASECO LLP trades as MASECO Private Wealth. It is a partnership registered in England and Wales and has its registered office at Burleigh House, 357 Strand, London, WC2R 0HS. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document. This document does not constitute and should not be construed as investment or any other advice. The information contained herein is subject to copyright with all rights reserved.