Every year about this time the big Wall Street wirehouses, smaller independent broker-dealers and national mutual fund and ETF companies release their annual outlooks for the financial markets, and the financial press, including ThinkAdvisor, report on those forecasts. We are doing that again this year, but before we focus on specific markets, we wanted to add some context to those stories by looking back at this year’s forecasts released a year ago to see how wrong or right they were.
The performance, not surprisingly, is mixed. Here’s what we found.
What Forecasters Got Wrong for 2015
Just about every economic forecaster got the timing of the first Federal Reserve interest rate increase since June 2006 wrong. At the end of 2014, most expected the Fed would “get off zero,” as Bill Gross puts it, in June 2015. When that didn’t happen, the expectation moved to September; when that, too, failed to materialize it moved to December, which turned out to be correct. The Fed raised its short-term federal funds rate from a range of 0-0.25% to a range of 0.25%-0.50% and suggested it would hike four more times next year.
Fed Chair Janet Yellen all but promised the central bank would make the move this month, barring any catastrophic event, when she testified before the congressional Joint Economic Committee in early December that continued improvement in the labor market would boost the Fed’s confidence that inflation will move back to its 2% target. The following day, the government reported a jump of 211,000 in November payrolls and a four-cent increase in hourly wages, capping a 2.3% increase over the past year, suggesting that inflation will indeed move toward the Fed’s target.
Bond Yields & Prices
With no Fed rate hike materializing during the first 11 months of 2015, it’s not surprising that the yield on the 10-year Treasury note, a benchmark for 30-year fixed mortgages and other loans, is poised to end 2015 below the 3% median forecast of 74 economists tabulated by Bloomberg. The 10-year Treasury yield is instead poised to finish 2015 near 2.2% — very near where it started the year.
Even Jeffrey Gundlach, co-founder and CEO of Doubleline Capital, who forecast a drop in bond yields this year, got it wrong. He said the 10-year Treasury yield could drop to 1.37% this year – or even 1% if crude oil fell below $40 a barrel. Oil prices in the U.S. did slide below $40 during the first week in December and was near $35 a barrel on Thursday, but the 10-year Treasury was still yielding over 2.2%.
A year ago, expectations on Wall Street called for oil prices to rise slightly, to a range of $70-$85 a barrel for U.S. West Texas Intermediate by year-end. After prices plummeted in early January, those forecasts were lowered by about $30 a barrel. Now even those revised levels seem too high. Crude oil is now trading near seven-year lows — near $35 a barrel for WTI and $37 a barrel for North Sea Brent – because supplies exceed demand. OPEC production is running at a three-year high, and Saudi Arabia, the world’s biggest single exporter of crude oil, has refused to cut its output to rein in OPEC production.
For the first time in 15 years, cash has outperformed stocks and bonds, according to Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch. It wasn’t supposed to be that way. Wall Street strategists forecast 7%-8% gains in the S&P 500 with earnings growing about the same amount, but as of Thursday, the S&P 500 is down a few points year to date and earnings and revenues are expected to decline about 4% and 3%, respectively, according to S&P Capital IQ. It would be the first earnings decline for the index since 2009, when the stock market was reeling from the impact of the Great Recession.
What Forecasters Got Right for 2015
At the end of 2015, the consensus among economists was that the U.S. economic growth would accelerate – and wages would finally rise — while growth in Europe and Asia would slow, creating a disparate approach to monetary policy. The U.S. would tighten policy while many other countries would lower rates.
The forecasts got the directions right but some of the details wrong. The U.S. didn’t tighten as much as expected, China surprised the market by devaluing its currency 2% overnight in August and Japan slipped back into recession. And in Europe, no one had expected the migrant crisis would deepen as much as it has, and that will at least initially carry financial costs.
The price of every commodity in the Bloomberg Commodity Index except cotton and sugar fell in 2015, as the index headed for its fifth straight annual loss. The index, which has 22 components, is down 30% year to date. Most analysts and strategists had expected commodity prices would fall – especially oil and precious metals prices – but not necessarily as far as they have, and some were neutral or bullish on selective agricultural commodities and industrial metals because of healthy supply-demand fundamentals.
The continuing weakening of China’s economy, which is a huge consumer of industrial metals, for example, upset that calculation and dragged down industrial metals prices along with precious metals prices.
Forecasters correctly expected that the U.S. dollar would continue to advance against other major currencies this year because the U.S. economy was growing while many other global economies were shrinking or standing still.
That forecast for the dollar was another reason analysts and strategists were bearish on commodities. Most commodities are priced in dollars so a stronger dollar translates into a lower commodity price and vice versa.
The Outlier – Emerging Markets – Both Right and Wrong
It’s difficult to use a broad brush to forecast what will happen in the emerging markets universe because the group is so diverse and market developments impact each differently.
For example, falling oil prices are beneficial for oil importers like India, Korea and Turkey but not for oil producers like Venezuela and Ukraine. And emerging markets that depend on exports to China are especially vulnerable when demand from China falls because its economy slowed faster than many had expected.
Overall though, emerging markets have been a bust in 2015. The iShares MSCI Emerging Markets ETF (EEM) is down almost 16% through as of midday Thursday.
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