Imagine an oracle last year told you that the US inflation rate would accelerate to a four-decade high of 6.8 per cent by Christmas. Most investors would immediately rinse all fixed income from their portfolio, and take a long hard look at those glamorous growth stocks.
Instead, the 10-year Treasury yield is trundling along at 1.4 per cent, up just half a percentage point from where it started the year. Even the 30-year US government bond yield — which should be hypersensitive to any whiff of inflation — has only nudged up from 1.6 per cent to 1.8 per cent.
Of course, swaths of the bond market have indeed been under pressure this year, and many of the stock market’s biggest pandemic-era winners have swooned lately. Nonetheless, that even foreknowledge of 2021’s most widely anticipated macroeconomic variable would not necessarily have made you money shows how delightfully humbling financial markets can be.
With that said, it is still often worthwhile going over old predictions and examining how well they did. Even newspaper columnists should hold themselves to account, and hopefully learn from their errors. Or be honest about the calls they got right, but only accidentally.
A year ago I presented a handful of deliberately but only mildly contrarian scenarios that seemed out of step with the consensus of Wall Street’s year-ahead forecasts. On the whole they weren’t bad, but not good enough for me to fire up a Robinhood account and reinvent myself as a day trader.
My first prediction was that growth stocks would again outpace value stocks, on the view that the Biden White House would eschew an antitrust assault on Big Tech and that Treasury yields would remain calm. It was a close run thing — especially when value stocks were on fire this past spring — but the MSCI USA Growth index is now up 25 per cent for the year, pipping the 21 per cent gain for the MSCI USA Value gauge.
Things get dicier with my prognostications on inflation. Yes, the prediction that the Treasury curve would see-saw but not end the year meaningfully steeper and could even flatten was spot on. But my main argument — inflation would remain calm — was hilariously wrong.
The emerging markets call was better, but lucky. Although noting that the arguments for outperformance were solid, I noted that “emerging markets do have a nasty way of disappointing when optimism is this high”. Thank you, Xi Jinping, for allowing me to claim that as a fluke win after China’s market-rattling regulatory crackdown.
The next contrarian scenario was to “short volatility”, on the argument that many investors were overpaying for insurance against market turbulence, and many sellers of it had been burnt to a cinder in March 2020. It’s a rough proxy, but ProShares’s Short Vix Futures ETF has returned almost 30 per cent this year, so that is another unlikely victory for contrarianism.
The next two predictions were better. Not only did I suggest that the gloom surrounding the US dollar was wildly overdone — lo and behold, the DXY dollar index has climbed 7 per cent in 2021 — I raised the prospect of the Democrats triumphing in both Georgia Senate races, which would allow them to pursue a far more ambitious agenda with huge fiscal stimulus.
Of course, the truth is that everything I appeared to get vaguely or uncannily right often still came from incomplete or faulty arguments. My core prediction — that inflation wouldn’t become a meaningful problem — was radically wrong. My forecast that a Democratic sweep in George would cause a bout of market turbulence was also quickly demolished.
In markets, it is always tempting to conclude that one’s victories are thanks to one’s own brilliance, and any failures must be the fault of the Federal Reserve, passive investing or some other convenient scapegoat.
Yet as the opening soothsaying scenario shows, even if we were gifted with some foresight, successful investing is very difficult. Getting it right occasionally can be thanks to skill or luck, but doing so in the long run is an almost Herculean task that the data shows is beyond the ken of most humans.
So at the risk of literally talking my book — some readers may have heard that I recently published a tome on the history of the index fund — I think that whatever 2022 holds for us, a passive approach will still do better than most active investors.