Tags: rates | US | GDP | Fed

The Poor Predictive Powers of Conventional Wisdom

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Thursday, 16 Apr 2015 10:54 AM Current | Bio | Archive

There is usually a certain consensus opinion regarding the near-term prospects of the market. Gauging such a thing is somewhat of an art but can be gleaned by following the financial media on a daily basis and talking to investors. This consensus opinion can also be referred to as conventional wisdom. The problem is that it is usually wrong.

Let's look at the recent past.

At the beginning of last year the great concern was rising interest rates. The Federal Reserve had just begun to taper its $85 billion per month bond buying program. Between the Fed announcement of its intention to taper in the spring of 2013 and the end of that year, the 10- year Treasury rate soared from below 2 percent to 3 percent. It was anticipated, by what I estimate, to a majority that we would see more of the same regarding interest rates as the actual taper began to unfold.

But rates didn't rise. They fell. The 10-year Treasury rate fell from 3 percent at the beginning of 2014 to below 2 percent a year later. If you abandoned interest rate-sensitive stocks like utilities and REITs in anticipation of rising rates, you missed out on some good-performing investments.

As last year progressed, first-quarter GDP came in at -2.7 percent. This horrible number, combined with falling rates, led many to deduce that the falling rates were telling us something about the economy. Rates were commonly assumed to be falling because the markets knew the recovery was in trouble.

But that view turned out to be completely wrong. The economy only stumbled temporarily and then came roaring back in the second and third quarters, with GDP growth of 4.7 percent and 5 percent, respectively.

As oil and commodity prices crashed this past fall, the common perception was that weak and the prospect of even weaker global demand going forward was largely behind the selloff. The conventional view was that the global economy was getting worse while the U.S. was getting stronger.

But so far this year the opposite seems to be happening. U.S. growth has been weaker than anticipated and growth overseas has been better. In fact, the International Monetary Fund just cut forecasts for U.S. GDP growth for 2015 and increased estimates for Europe and Japan.

While the S&P 500 has returned less than 3 percent so far in 2015, the iShares MSCI EAFE ETF (EFA), a benchmark for developed markets globally, is up more than 9 percent year to date and more than 5 percent in just the past month. The Euro Stoxx 600 index has gained about 20 percent year-to-date and the iShares MSCI China ETF (MCHI) is up 23 percent this year.

So, what is conventional wisdom saying now?

As far as I can ascertain, opinion is decidedly in the direction of a U.S. economy that is losing steam. Recent earnings estimates and reports combined with economic data support this notion. The view is also that the global economy will continue to languish. As a result, interest rates will likely go nowhere in the near term, except possibly lower. Even if the Fed does impose a token rate hike (in December according to futures markets), the general interest rate environment will still be benign or lower.

Anything is possible, of course. The above scenario could turn out to be true. But recent evidence suggests the conventional view has a bad track record. Perhaps it would be wise not to invest too heavily in this view and at least hedge your bets.

About the Author: Tom Hutchinson
Tom Hutchinson is a member of the Newsmax Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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TomHutchinson
There is usually a certain consensus opinion regarding the near-term prospects of the market. Gauging such a thing is somewhat of an art but can be gleaned by following the financial media on a daily basis and talking to investors.
rates, US, GDP, Fed
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2015-54-16
Thursday, 16 Apr 2015 10:54 AM
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