First Quarter Update on 2011's Sure Things

Last Updated Apr 4, 2011 9:41 AM EDT

For those of you new to this blog, I believe in holding people making financial predictions accountable. This year, we're tracking eight "sure things" that the talking heads in the media believed would happen in 2011. Here's our first update. Keep in mind that if they're sure things, they should all (or at least most of them) come true.

China We begin with China being the best place to invest. The SPDR S&P China ETF (GXC) closed 2010 at 76.24 and ended the first quarter at 81.06, a gain of 6.3 percent, virtually matching the return of the Vanguard 500 Index Fund (VFINX) while underperforming other asset classes such as U.S. small-caps, small-cap value large-cap value and even REITs.

Large-Cap Stocks The second sure thing was that this was going to be the year of large-cap stocks. Since large-cap stocks outperform small-cap stocks about 40 percent of the time, if gurus keep predicting it will happen, they'll eventually get it right. Through April 1, VFINX (a proxy for large-cap stocks) returned 6.4 percent, underperforming the Vanguard Small Cap Index Fund (NAESX) by 3 percent.

Inflation The third sure thing was that all of the monetary stimulus would cause the rate of Inflation to take off. The CPI rose 0.5 percent in each of the first two months. However, the core (ex-food and energy) rate increased just 0.2 percent in each of those months. The core is a much better predictor of future inflation due to the high volatility of food and energy prices. Only time will tell if that holds true in this case.

Interest Rates The fourth was that Interest rates would rise substantially. The 10-year Treasury rate did increase, but only slightly, from 3.36 percent at year end to 3.46 percent on April 1.

Municipal Bond Default The fifth was that there would be a massive wave of defaults on municipal bonds, with Meredith Whitney calling for "50 to 100" sizeable muni defaults, totaling about $100 billion, in 2011. In 2010, 82 deals failed to pay on just $2.7 billion in bonds (and most of these defaults were on project specific bonds, non-rated bonds, or junk bonds, the kind you should avoid). So far in 2011, the statistics are actually improving.

According to Standard & Poor's, municipal-bond defaults in the first two months of 2011 are down 50 percent from the same period last year. Eight bond deals totaling about $222 million have entered default this year, compared with 16 totaling more than $329 million during the same period of 2010. And so far this year, there has been only one bankruptcy filing. It was by Boise County, Idaho, which has no outstanding municipal bonds.

Gold The gurus' crystal balls were clearer when we look at the next two sure things. First, gold would continue to soar. It ended 2010 at $1,406 an ounce, and closed April 1, at $1,428 an ounce, an increase of 1.6 percent. While not a major increase, it was still headed in the right direction.

Oil The other sure thing that actually happened was that the price of oil would rise to well over $100 a barrel. Brent Crude ended the year at around $99 a barrel and stood at over $115 on April 1. This is the one clear winner among the first seven sure things.

Picking Stocks The last sure thing was that 2011 will prove to be a stockpicker's year. While we don't yet have the official S&P Indices Versus Active scorecard, we already know how that will turn out -- as William Sharpe explained: "Properly measured, the average actively managed dollar must under perform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement."

We will continue to track the sure things throughout the year.

More on MoneyWatch:
How Did the "Sure Things" Fare in 2010? My 2010 Book List What Would Happen if Everyone Indexed? John Bogle: Can His Son Beat the Market? Quest for Alpha: 10 Rules for Being a Successful Investor
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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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