The markets always surprise and often quickly. Consider how some forecasts for 2011 performance have panned out only a few months after the annual dissection of entrails and analysis of omens by economists that raises excitement at the end of a year and the beginning of a new one.

After the end of the first quarter’s trading, the following surprises in the 2011 forecasts were evident:

> In Canada, utilities have been strong winners, although they were expected to underperform. The industrial and energy sectors have performed well — and most analysts and money managers expected that. But consumer stocks are running contrary to generally strong bullish forecasts.

> In the U.S., technology stocks as well as consumer stocks have been big disappointments, while health-care stocks have done unexpectedly well.

> As the year had progressed, analysts and money managers started to believe the small-cap and mid-cap boom would soon end and large-cap stocks would begin to lead the markets. But the mini-crash in March, expected to wreak this change, ended fast. Nothing changed. Small-cap and mid-cap stocks in both Canada and Wall Street have recovered quickly — so strongly, in fact, that their indices have moved to or close to record highs.

The accompanying table lists some of the greater surprises. Compare these figures with the 5.6% rise in the S&P 500 composite index and the 5.7% rise by the S&P/TSX composite index in the first 14 weeks of the year.

The markets are seeing the future differently than they did three or four months ago. Pessimism is stronger, despite high stock valuations. Projections of economic growth are being cut as the rise in oil prices alters both consumer spending intentions and businesses’ sales and cost forecasts. In addition, interest rates may rise, sovereign debt crises around the world continue and the U.S. debt crisis looks more serious. Higher food prices are causing unrest in parts of the world.

Price pressure on consumers and producers is higher. Con-sumers are more reluctant to spend as food, apparel and fuel prices rise. For manufacturers and processors, raising prices to offset rising costs of raw materials is difficult because consumers are trimming their spending.

One example of the margin squeeze is in apparel, in which a 60% rise in the price of cotton usually results in a 5% rise in the price of apparel. However, cotton has risen by 160%. Switching to polyester is no help as it has jumped in price, too, because its raw material is petroleum.

Inflation is stronger than the official numbers suggest. The official U.S. core inflation rate is 1.2%; including food and fuel, it’s 2.7%. But if inflation was calculated the way it was back in the days of former president Bill Clinton, it would be almost 10%, suggests economic consultant John Williams, who runs the website

The U.S.’s producer price index for finished goods is rising at a 12.5% annual rate.

Canada’s core inflation rate is 0.9%; the overall inflation rate is 2.2%.

Higher oil prices undermine everything — cutting consumer spending on other necessities and increasing business costs. The benchmark grade of U.S. crude oil was slightly below US$90 a barrel at yearend 2010, but has since risen to as high as US$112. Brent crude, the European benchmark, has been above US$120.

Rising fuel costs have had a mixed reaction from transportation stocks. U.S. airline stocks have dropped by 1.4% and trucking stocks have dropped by 5.5% while railway shares have gained by 8.5%. Canadian transportation stocks have gained by 2.7%, with railways up by 3.1% and airlines down by 5.1%.

Despite the rise in oil prices, the biggest energy-sector gainers have been drilling stocks — up by 27.8% in the U.S. and by 42.1% in Canada. On Wall Street, oil and gas equipment and services stocks have gained by 13.3% but are up by only by 5.8% in Canada. IE