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How Are 2011's Sure Things Faring at Mid-Year?

Each year, we keep track of some of the "sure things" that those in the media are certain will happen to the economy, providing updates each quarter. This year, we've identified eight things that were "certain to happen" this year:

  • Chinese investments would outperform.
  • Large-cap stocks would outperform.
  • Inflation would be rampant.
  • Interest rates would rise substantially.
  • Municipal bonds would experience widespread default.
  • Gold would continue to rise.
  • Oil would rise.
  • This would be a stockpicker's year, meaning active managers would outperform.
Keep in mind if they're sure things, they should all (or at least most) come true. Let's see how they're doing.
Photo courtesy of Mr. T in DC on Flickr.
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 second quarter at 78.33, a gain of 2.7 percent, With a dividend yield of about 1.6 percent, the total return was about 3.5 percent. Vanguard's index funds had following returns:
  • Vanguard 500 Index Fund (VFINX) -- 6 percent
  • Vanguard Small-Cap Index Fund (NAESX) -- 7.5 percent
  • Vanguard Small-Cap Value Index Fund (VISVX) -- 4.9 percent
  • Vanguard Value Index Fund (VIVAX) -- 6.3 percent
  • Vanguard REIT Index Fund (VGSIX) -- 10.2 percent
  • Vanguard Developed Markets Index Fund (VDMIX) -- 5.3 percent
  • Vanguard Total International Stock Index (VTSMX) -- 3.7 percent
In other words, it underperformed all major equity asset classes. (Score 0 +/1-)
Photo courtesy of Dainis Matisons on Flickr.
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, this is not much worse than a coin flip -- and if gurus keep predicting it will happen, they'll eventually get it right. Through June 30, the Vanguard 500 Index Fund (VFINX, a proxy for large cap stocks) returned 6.0 percent, underperforming the Vanguard Small-Cap Index Fund (NAESX) by 1.5 percent. (Score -, Total Score 0+/2-)
Photo courtesy of redwood 1 on Flickr.
Inflation The third sure thing was that all of the monetary stimulus would cause the rate of inflation to take off. Here are the increases for the first five months:

However, the core (ex-food and energy) increased at a much smaller rate. (The core is a much better predictor of future inflation due to the high volatility of food and energy prices.)

And finally, with oil prices having fallen sharply in June, it seems likely that the next report will not show signs of rapidly increasing inflation. Bottom line, the rate of inflation has picked up a bit, but has certainly not taken off. We'll give this a score of zero as it least the direction was correct. (Total Score 0+/2-)

Photo courtesy of lizadanger on Flickr.
Interest Rates The fourth was that interest rates would rise substantially. The 10-year Treasury rate actually fell, from 3.36 percent at year end to 3.18 percent. (Total Score 0+/3-)
Photo courtesy of ralphunden on Flickr.
Municipal Bonds The fifth was that there would be a massive wave of defaults on municipal bonds, with Meredith Whitney calling for "50 to 100" sizeable 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 we recommend you avoid).

So far, state and local governments have taken dramatic actions to prevent Whitney's forecast from coming true. And so far this year there have been few defaults. If the second half of the year looks like the first, her forecast will go down alongside BusinessWeek's 1979 forecast of "The Death of Equities" as one of the worst of all time. (Total Score 0+/4-)

Photo courtesy of EnergeticNYC on Flickr.
Gold The gurus' crystal balls were clearer when we look at the next two sure things. Our sixth sure thing was that the price of gold would continue to soar. It ended 2010 at $1,406 an ounce, and closed June 30 at $1,502, an increase of 6.8 percent. (Total Score 1+/4-)
Photo courtesy of covilha on Flickr.
Oil The seventh 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 closed the first half of the year at around $110. (Total Score 2+/-4)
Photo courtesy of sjorford on Flickr.
Stockpicking The last sure thing was that 2011 will prove to be a stockpicker's year. Since we don't have the S&P Indices Versus Active Scorecard yet, we'll call this one a push for now.

However, if hedge funds are any indication, we know how this will turn out. So far this year, hedge funds are lagging all major indexes.

Photo courtesy of yomanimus on Flickr.
Conclusion That leaves us with just two of the eight sure things for 2011 having actually occurred so far, not a very good track record for "sure things." My long experience in the markets, including running trading rooms for some of the largest institutions in the U.S., has taught me that all crystal balls are cloudy, including my own. As Warren Buffett says: "A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting."

Photo courtesy of Ethan Bloch on Flickr.
More on MoneyWatch:
First Quarter Update on 2011's Sure Things How Did the "Sure Things" Fare in 2010? Investment Quiz: Who Said It? The Bigger Active Funds Get, the Worse Their Alpha Investors Get It Wrong -- Again
Three ways I can help you become a wiser investor:

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