First Quarter Review of 2020 “Sure Things”

Every January, I start keeping track of the predictions for the upcoming year I hear in the financial media and from advisors and investors. With the arrival of the second quarter, it’s time for my first review of how those forecasts played out.

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 the first quarter review of the nine sure things I am tracking:

U.S. economic growth will be durable enough to avoid a recession, but disappointing to those expecting improvement. GDP growth will slow from about 2.3% in 2019 to 1.8% in 2020. The coronavirus threw a “monkey wrench” into all economic forecasts. The April forecast from the Conference Board now has a “base” case forecast of an annualized 33% contraction in GDP in Q2 and no growth in Q3. While Q4 will see a sizable rebound, the economy will contract by 6.5% for the entire year (compared to 2019). Score -1.

Corporate profit growth will continue to be strong. S&P 500 companies’ earnings will reach a cumulative $178 per share, up from an estimated $162 for 2019, a 10% increase. As of April 16, the consensus forecast for the year was $141, a drop of 13%. It seems likely that forecast will be revised significantly downward. Score -1.

While price-to-earnings multiple expansion is likely behind us, reduced trade tensions, easy monetary policy and strong earnings growth will produce high single-digit returns for U.S. stocks. The S&P 500 Index returned -19.6% during the first quarter. Score -1.
Inflation will remain tame. Vanguard’s Joe Davis wrote, “Secular drags, including globalization, technological innovation, and well-anchored inflation expectations have been keeping inflation contained in recent years; and we expect this to persist over the medium and long term.” The consensus forecast of professional economists is for the CPI to increase at just 2.1%. The market certainly agrees, as the spread between 10-year TIPS and 10-year nominal Treasury bonds is only about 1.8%. While the coronavirus negatively impacted the first three sure things, it helped this one. In both January and February, the core CPI rose a seasonally adjusted 0.1%, and then fell 0.4% in March as oil prices collapsed. It certainly looks like inflation will remain tame, at least in the short term. Score +1.

With slowing economic growth and tame inflation, it’s now safe to extend maturities. Futures markets show a much greater probability that the Fed funds rate will be lower at the end of the year (52%) than higher (just 2%). This is another forecast that was helped by the coronavirus. The Federal Reserve acted quickly to lower the Fed funds rate to effectively zero. Vanguard’s Long-Term Treasury Index ETF (VGLT) returned 21.7%, outperforming Schwab’s Intermediate-Term U.S. Treasury ETF (SCHR), which returned 7.4%, and Schwab’s Short-Term U.S. Treasury ETF (SCHO), which returned 2.8%. Score +1.

This sixth sure thing followed from the fifth. The interest rate environment favors REITS. Thus, investors should overweight them. Vanguard’s Real Estate ETF (VNQ) lost 24.2%, underperforming Vanguard’s S&P 500 ETF (VOO), which lost 19.6%. Score -1.

Large-cap stocks will continue to outperform small stocks, as they have over the last decade. The authors of the Harvard Business Review article “The Gap Between Large and Small Companies Is Growing” explained, “Large corporations are more and more likely to maintain their dominant positions, while small corporations are less and less likely to become big and profitable.” Vanguard’s Small-Cap ETF (VB) lost 30.1%, underperforming Vanguard’s S&P 500 ETF (VOO), which lost 19.6%. Score +1.

With concerns over continued massive budget deficits combined with the outlook for accommodative monetary policies around the globe, gold will put in another strong performance. The SPDR Gold ETF (GLD) returned 3.6% for the quarter. Score +1.

Climate change will lead to another year of significant losses to reinsurers. Thus, investors should avoid this asset class. It’s too early to say much about this asset class because the hurricane season has not arrived. We’ll score this a 0.

Perhaps surprisingly, given the unexpected crisis caused by COVID-19, our final score is +4/-4.

I’ll report back again at the end of next quarter.

Larry Swedroe is the chief research officer for Buckingham Strategic Wealth and Buckingham Strategic Partners.

First Quarter Review of 2020 “Sure Things”

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