10 "Sure Things" for 2014: First-Quarter Review

Now that we've got one quarter of 2014 behind us, it's time to review how some financial pundits' "sure thing" predictions for this year are turning out. Keep in mind that if they were "sure things," they should all (or at least most) be coming true. We'll give a score of +1 for a forecast that's coming true, a -1 for a wrong prediction, and a 0 for one that's basically a tie.

Our first sure thing is that with the Fed announcing its plan to end quantitative easing, interest rates will rise. Thus, investors should limit bond holdings to the shortest maturities. Vanguard's Short-Term Bond Index Fund (VBISX) returned 0.4 percent, its Intermediate-Term Bond Index Fund (VBIIX) returned 2.5 percent and its Long-Term Bond Index Fund returned 6.9 percent. Score: -1

Our second sure thing follows from the first. With the Fed tightening, emerging markets equities will perform poorly. Vanguard's Emerging Markets Index Fund (VEIEX) returned -0.4 percent. And it underperformed the 1.8 percent return of Vanguard's 500 Index Fund (VFINX) by 2.2 percent. While not a terrible performance, we'll be generous. Score: +1

The third sure thing is that with the cyclically adjusted price-earnings ratio (or CAPE) at 26.17 as we entered the year, about 60 percent above its long-term average, stocks should be avoided. As we mentioned, VFINX returned 1.8 percent, outperforming cash and safe short-term bonds. Even stronger performances were turned in by Vanguard's Small Cap Index Fund (NAESX), which returned 2.6 percent; Vanguard's [Large] Value Index Fund (VIVAX), which returned 2.8 percent; and Vanguard's Small Cap Value Fund (VISVX), which returned 3.4 percent. Score:-1

The fourth sure thing is that as monetary stimulus continues to be injected into the economy, we'll see a sharp rise in inflation. The last Consumer Price Index (CPI) report was for February. Its CPI for All Urban Consumers (CPI-U) increased just 0.1 percent on a seasonally adjusted basis. The prior two months showed increases of 0.1 percent and 0.2 percent. Over the last 12 months, the all items index increased just 1.1 percent before seasonal adjustment. Score: -1

The fifth sure thing follows from the fourth: Rising inflation will lead to a falling dollar. The dollar index closed 2013 at 80.29. It closed the first quarter virtually unchanged at 80.28. Score: -1

The sixth sure thing follows from the fourth and fifth: Gold will reverse the sharp fall it experienced in 2013. Gold closed last year at $1,204.50. It ended the first quarter at $1,291.75 Score: +1

The seventh sure thing is that the municipal bond market will be hit by both interest rate increases and default problems, keeping investors away. We saw neither problem. Vanguard's Short-Term Tax Exempt Fund returned 0.3 percent, its Intermediate-Term Tax Exempt Fund (VWITX) returned 2.6 percent and its Long-Term Tax Exempt Fund (VWLTX) returned 4.0 percent. Score: -1

The eighth sure thing is that the recovery will continue its tepid path, with the Philadelphia Federal Reserve's Survey of Professional Forecasters predicting GDP growth of 2.6 percent. The first-quarter data aren't available yet, so we can't report. However, it seems that the winter's dreadful weather will likely have a negative impact on the first-quarter growth. We'll wait till the second quarter before giving a score.

The ninth sure thing is that after defying the gurus in 2013, market volatility will rise. The VIX "fear index" ended 2013 at 13.43, and it closed the first quarter slightly higher, at 13.88. We'll call this a draw. However, it's worth noting that the VIX typically trades in steep "contango" -- today's futures prices are higher than today's spot prices. Thus, if one had bet on the VIX rising by purchasing an April contract in January, it would have been a big loser. Score: 0

Our tenth sure thing is that active management will beat passive in net returns. Seventy-five percent of advisors believed that, according to InvestmentNews in January. Technically, we'll have to wait for the annual SPIVA report to give the score on this one, though we know that it's never really a stock-picker's year.

Overall, the "sure things" clearly haven't turned out that way so far. Keep this in mind the next time you're tempted to give credence to some guru's can't-miss forecast.

  • Larry Swedroe On Twitter»

    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 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.