Third Quarter Review of 2020 “Sure Things”Advisor Perspectives
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 fourth quarter, it’s time for my third 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 third 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 Philadelphia Federal Reserve’s Third Quarter 2020 Survey of Professional Forecasters forecasts full year growth of -5.2%. 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 $130, a drop of 20%. Score -1.
- While 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 about 6% over the first nine months. I doubt that anyone forecasting negative economic 5% growth for the year would have predicted a 6% return. 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 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 Third Quarter 2020 Survey of Professional Forecasters forecasts full year inflation of only 0.4%. 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 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 21.4%, outperforming Schwab’s Intermediate-Term U.S. Treasury ETF (SCHR), which returned 8.2%, and Schwab’s Short-Term U.S. Treasury ETF (SCHO), which returned 3.1%. Score +1.
Read the full article here by Larry Swedroe, Advisor Perspectives