A Second Quarter Review of 2019 “Sure Things”
At the start of 2019, I compiled a list of predictions that so-called financial gurus had made for the upcoming year, along with some items I heard frequently from investors, for a consensus on the year’s “sure things.” The turn of the calendar means it is now time for our second quarter review. As is my practice, I will give a score of +1 for a forecast that came true, a score of -1 for one that was wrong, and a 0 for one that was basically a tie.
Here is how we stand with respect to the eight sure things I am tracking:
- U.S. economic growth would continue strong, slowing just slightly from about 3% to 2.7%. The U.S. economy grew by an annualized 3.1% in the first quarter of 2019. And the Philadelphia Federal Reserve’s Second Quarter Survey of Professional Forecasters, released on May 10, 2019, now projects second quarter GNP growth of just 1.9% and full year growth of just 2.6%. We’ll score this +1.
- Corporate profit growth would continue to be strong, with Morgan Stanley predicting S&P 500 companies’ earnings would reach a cumulative $178 a share, an increase of about 8%. The latest (June 24th) consensus analysts’ estimates for S&P 500 operating earnings per share have been lowered to about $166. Score: -1.
- The U.S. stock market would have a strong year. Bloomberg gathered 14 forecasts for 2019 from the firms it tracks, and the average prediction was for the S&P 500 Index to rise to 3,056 by year-end. Fueling the strong forecast was that, based on forecasted earnings, valuations had fallen to the cheapest levels since 2006—the forward-looking price-to-earnings ratio is only about 15. Mike Wilson at Morgan Stanley was the least bullish, with a target at 2,750. The S&P 500 Index closed the second quarter at 2,942, and the SPDR® S&P 500 ETF (SPY) provided a total return of more than 18%. Score: +1.
- With economic growth moderating, inflation would remain tame. The consensus forecast of professional economists was for the CPI to increase by just 2.3%. The market certainly agreed, as the spread between 10-year TIPS and 10-year nominal Treasury bonds was only about 1.9 percentage points. The first five months of 2019 produced increases of 0.0%, 0.2%, 0.4%, 0.3% and 0.1%, respectively, or an average of 0.2% per month, right in line with the full year forecast. Score: +1.
The fifth sure thing was that, with slowing economic growth and tame inflation, it would be safe to extend maturities. Futures markets showed a 91 percent probability of no rate increases in 2019 by the Federal Reserve. Thus, longer-term bonds would outperform. In the first half, Vanguard’s Long-Term Treasury Index ETF (VGLT) returned 10.5 percent, outperforming Schwab’s Intermediate-Term U.S. Treasury ETF (SCHR), which returned 4.9 percent, and Schwab’s Short-Term U.S. Treasury ETF (SCHO), which returned 2.4 percent. Score: +1.