2019 Predictions: A Mid-Year Review
Six months ago, I issued “My 5 Predictions for Investors in 2019.” Each prediction is numerical and can be precisely measured. Also, each of these numbers is clearly defined and readily available. That way, there is no debating the extent to which they are right or wrong.
Now that we’re halfway through the year, let’s see how I’m doing so far.
“The average closing value of the VIX will be 20% higher”
The VIX is sometimes referred to as the “fear index.” That’s because a high VIX reading means institutional investors are buying a lot of put contracts on the S&P 500 index. A put options increases in price as the value of the index decreases.
Last year, the average closing value of the CBOE Volatility Index (“the VIX”) was 16.6. For this prediction to come true, the VIX would have to spike to an average closing value of 22.6 during the second half of the year. That’s not likely to happen unless we get a major stock market correction during the third quarter, similar to last year.
“The monthly U.S. unemployment rate will hit 4.5%”
In May, the unemployment rate came in at 3.6%. That’s as low as it has been in nearly 20 years, and well below the 4.5% rate I predicted. For this prediction to come true, economic growth in this country would have to fall precipitously.
I don’t think that will happen, at least not this year. As long as the Federal Reserve remains dovish on interest rate hikes, a recession is unlikely. With the 2020 presidential election only sixteen months away, the Trump administration will do everything in its power to keep unemployment low.
“The FTSE will outperform the Dow Jones Industrial Average”
Finally, a prediction that has a decent chance of coming true! The Financial Times Stock Exchange 100 (“FTSE”) is the British equivalent of the DJIA. When I made this prediction, I thought the DJIA would be flat this year. If so, then the FTSE would only need to post a modest gain to beat it.
That’s not how it is playing out in 2019, at least not so far. The DJIA is doing quite well this year, up 14% through June 30. But so is the FTSE, gaining 12% despite ongoing Brexit concerns in Europe. This one is too close to call and could come down to the final weeks in December when the stock market can be especially volatile.
“The euro will rise above 1.25 U.S. dollars”
So far this year, the euro has traded in a narrow range of $1.10 – $1.15. For the euro to rise above $1.25, the Fed would have to resume the “dot plot” of aggressive rate hikes it laid out last summer. That plan has been put on hold pending more data on the economy.
However, Fed Chair Jerome Powell has remained steadfastly non-committal regarding his position on the direction of interest rates. He has also asserted his independence from political pressure to keep rates low. If Powell does decide to raise rates later this year, this prediction could still come true. Stay tuned.
“Gold will get back above $1,500 per ounce”
On June 24, gold traded as high as $1,429 per ounce. Since then, it has backed off a bit but it still within striking range of $1,500. Similar to my euro prediction above, the outcome of this prediction largely hinges on how the Fed manages interest rates over the remainder of this year.
In addition to monetary policy, gold also reacts to emotional factors. In particular, geopolitical instability often results in a spike in demand for gold. For example, if negotiations with Iran go off the rails, we may see gold prices surge as the threat of war intensifies.
Let’s hope that doesn’t happen. Of course, I’d much rather get my predictions wrong than see a lot of people suffer. I’ll write a follow-up article in January with a final accounting of my accuracy.
As this exercise proves, predicting human behavior is at best an inexact science. For that reason, you should proceed cautiously when making investment decisions based on expectations of future outcomes.
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