Final 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 2021, it’s time for my final review of how the 2020 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 final review of the nine sure things I was 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, according to the Philadelphia Federal Reserve’s 2019 survey of professional forecasters. The coronavirus upended all economic forecasts. Its fourth quarter 2020 survey predicted full-year growth of -3.5%. 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 September 24, the consensus forecast for the year was $136, a drop of 16%. Score -1.

While P/E 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. Demonstrating that the economy and the stock market are very different things, the S&P 500 Index returned 18.4%. Despite the estimated 3.5% decline in GNP and the estimated 16% decline in earnings, the S&P 500 Index more than doubled the forecast. 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 in the Philadelphia Federal Reserve’s 2019 Survey was for the CPI to increase at just 2.1%. The market certainly agreed, as the spread between 10-year TIPS and 10-year nominal Treasury bonds was only about 1.8%. The Philadelphia Federal Reserve’s Fourth Quarter 2020 Survey forecasted full-year inflation of only 1.24. While the COVID crisis negatively impacted the first two sure things, it helped this one. Score +1.

With slowing economic growth and tame inflation, it’s 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 Long-Term Treasury Index Fund Admiral Shares (VLGSX) returned 17.7%, outperforming Vanguard’s Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX), which returned 7.7%, and Vanguard’s Short-Term Treasury Index Fund Admiral Shares (VSBSX), which returned 3.1%. Score +1.

This sixth sure thing follows from the fifth. The interest rate environment favors REITs. Thus, investors should overweight them. Vanguard’s Real Estate Index Fund Admiral Shares (VGSLX) lost 4.7%, underperforming Vanguard’s 500 Index Fund Admiral Shares (VFIAX), which returned 18.4%. 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 Index Fund Admiral Shares (VSMAX) returned 19.1%, underperforming Vanguard’s Large Cap Index Fund Admiral Shares (VLCAX), which gained 21.0%. Score +1.

With concerns over continued growing 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 almost 24%. Score +1.
Climate change will lead to another year of significant losses to reinsurers. Thus, investors should avoid this asset class. Year-to-date returns have been positive. There are two publicly available reinsurance interval funds. Stone Ridge’s Reinsurance Risk Premium Interval Fund (SRRIX) returned 6.8% and the Pioneer ILS Interval Fund (XILSX) returned 7.4%. Score -1

Our final score was +4/-5. This was my 11th, and final, year of reporting on “sure things,” as the evidence has made the point that economic and market forecasts by gurus should be ignored. In the chart below that depicts the historical evidence, only about one third turned out to be true. Apparently, sure things are not so sure. Keep this in mind the next time you are tempted to react to some forecast, either yours or anyone else’s. And be especially aware when a forecast agrees with your preconceived ideas, as confirmation bias can be a dangerous condition.

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

Information presented herein is for educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information may be based upon third party information and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Specific securities mentioned due to their size in the market or the availability to the public and should not be interpreted as a specific recommendation to purchase that security. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth® and Buckingham Strategic Partners® (collectively Buckingham Wealth Partners). IRN-21-1676

Final Review of 2020 “Sure Things”

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