The best economists on the planet regularly hamper the investing community. For example, the National Bureau of Economic Research (NBER) acknowledged in December of 2008 that a recession had started one year earlier (December 2007). Unfortunately, by December of 2008, the S&P 500 SPDR Trust (SPY) had already forfeited close to half of its value (46%). Similarly, by the time that NBER recognized the existence of the 2001 recession in November of that year, the S&P 500 had shed 29% and the “New Economy” NASDAQ had plunged 65%.
Nevertheless, scores of analysts insist that U.S. stocks cannot fall a bearish 20% or more because the U.S. is not entering a recession. Haven’t these market watchers learned that financial markets themselves are better at forecasting than they are?
And it’s not just equities. Consider the bond market at the start of 2014. Bloomberg News surveyed the top banks and securities companies on where the 10-year Treasury yield would finish by December 31st. Every economist of the 50-plus in the poll had projected higher 10-year Treasury bond yields (i.e., lower prices on 10-year Treasury bonds). The average projection? The 10-year yield should move from 3.01% up to 3.41%. Instead, the 10-year dropped to 2.17%.
Every single top economist had completely whiffed with respect to the direction of interest rates (10-year yields). What’s more, every analyst who subscribed to the notion that economists are helpful in forecasting the direction of market-based securities missed out on an extraordinary bullish trend in bonds. Those who went against the herd in contrarian fashion – those who had followed basic technical trendlines and/or understood the fundamental backdrop of Treasury bond supply and demand – profited from an allocation to the long end of the yield curve. Indeed, one of our largest client holdings in 2014 had been Vanguard Long-Term Bond (BLV) – an asset that outperformed our stock holdings as well as the major benchmarks.
Are analysts or economists doing any better with their expectations for bond yields in 2015? With the average anticipated move up from 2.17% to 2.75%? In spite of bond market volatility, the 10-year essentially remains unchanged and I doubt that the same prognosticators are confident in a year-end rate of 2.75% today. Note: For our clients, we did move down the yield curve to reduce volatility. Clients currently hold positions in iShares 3-7 Year Treasury (IEI) or iShares 7-10 Year Treasury (IEF).