Which financial "sure things" happened in 2012?
(MoneyWatch) This is our final review of the financial world's "sure things" for 2012 (For those who are new to the blog, I compile a list at the beginning of each year of predictions that forecasters say are sure to come true, then hold those forecasters accountable.) Keep in mind that if they really were sure things, then all, or at least most, should come true. We will give a "+" for a forecast that can true, a "-" for one that was wrong and a "0" for one that can credibly be called a tie.
Europe
The first sure thing last was that investors should avoid European stocks because Europe was headed for a recession. While the recession part was right, Vanguard's 500 Index Fund (VFINX) returned 15.8 percent, while their European Index Fund (VEURX) returned 20.8 percent. Score: -1.
U.S. growth
Another certainty was that the U.S. economy would experience sub-par growth in the range of 2 to 2.5 percent, with unemployment remaining virtually unchanged. While we don't have final figures in, the Philadelphia Federal Reserve Survey of Professional Forecasts projects that the GDP will have grown 2.2 percent for the year. Thus, we can say that the GDP forecast was spot on, though the unemployment rate actually fell from 8.5 percent at the end of 2011 to 7.7 percent at the end of November 2012. Score: +1/-1
Inflation
The third sure thing was that the monetary stimulus would cause a significant increase in the rate of inflation, led by a rise in commodity prices, especially gold. Inflation defied the gurus, with the benchmark Consumer Price Index now projected by the Philly Fed to have fallen from 2011's 3 percent increase to just 1.9 percent. And while the price of gold did rise about 5 percent over 2012, from $1,600 an ounce to $1,676, oil prices actually fell about 8 percent, with West Texas Crude dropping from about $100 a barrel to less than $92 a barrel. Score: +1/-2
Interest rates
Interest rates were sure to rise, we were told, so investors should avoid all but short-term fixed income investments. Vanguard's Short-Term Bond Index Fund (VBISX) returned 1.9 percent and underperformed both Vanguard's Intermediate-Term Bond Index Fund (VBIIX), which returned 6.9 percent, and their Long-Term Bond Index Fund (VBLTX), which returned 8.5 percent. Score: +1/-3
China
According to this sure thing, the best place for investors to be was fast-growing economies like China. That turned out to be a pretty good call. The iShares MSCI China Index ETF (MCHI) returned 23.3 percent, and the iShares FTSE China 25 Index Fund (FXI) returned 19.2 percent. The table below lists the performances of the other major stock index funds.
We'll put this in the plus column. Score: +2/-3
Stock market
We also have been tracking forecasts for the Standard & Poor's 500 from 13 Wall Street investment strategists. The average forecast was for an increase from the year-end level of 1,258 of about 6 percent, to 1,334. Including the dividend yield of about 2 percent, the total return would be about 8 percent.
Given that the S&P 500 returned about 16 percent and ended the year at 1,426 , we can put this one clearly in the negative camp as well. And investors who acted on the bears' forecasts missed out on a great year for stocks.
And finally, we also take a look at the one sure thing that we hear from Wall Street every year: This will be a stock-picker's market. As sure as the sun rises in the east, we hear this from some Wall Street source (who makes the prediction after explaining why the prior year index funds outperformed). While we don't have the full year scorecard yet, S&P's Persistence Scorecard showed that through September the proverbial monkeys throwing darts have been outperforming active managers -- the persistence in outperformance by active managers was about what we should randomly expect.
This is the third year now that we reviewed the coming year's sure things, and it's the third year that not even a majority came true. Our little survey supports the large body of academic research that has found that no matter how much we would like to believe that there are good forecasters out there, no such legendary people exist. It's also a reminder of why Warren Buffett advised investors to ignore all forecasts, famously noting that "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."