Now that we have safely tucked away the year 2010 with the S&P 500 Index up 12.9 %, will we enjoy a similar or better return in 2011? Clearly, the majority of investors are looking for another up year. I believe that’s a safe bet, at least for the first half of the year.
Since March of 2009, I have been forecasting an up market and have been correct in doing so. Sure, during that time period we have had our ups and downs largely based on worries of a “double dip” recession here in the U.S. and financial problems in Europe. I discounted both events but also warned investors that the markets would react negatively. I considered those sell offs a buying opportunity. In hindsight, where I have erred was in estimating the severity and duration of some of these pullbacks.
For example, I did identify an interim top in the markets back in April (at around the S&P 500 1,220) but was too bearish in estimating the index would decline to 950 before the correction would be over. Instead, the S&P 500 tested and re-tested the 1,035 level and then resumed its climb in September.
The low in the markets coincided with The Federal Reserve’s announcement that they planned to launch a second quantitative easing. It was enough to reverse my cautious stance, admit my mistake, and turn positive on the markets. I have been bullish since the fall and have no reason to change my mind now that we are entering the New Year.
I believe the economy will hold positive surprises for us in the first half of the year. Growth will exceed most economists’ forecasts and although unemployment will remain high, we will see a steady improvement over the next several months as American corporations hire more workers. The housing market will also surprise us as well. I firmly believe 2010 saw the bottom in housing prices and sales. In 2011, we should see a small but steady improvement in all but the most bombed-out housing markets. The Fed will stay accommodative as well keeping short-term rates low and equities higher.
All this good news should translate into higher prices in global stock markets and in commodities. The S&P 500 could see gains of 15% plus before the year is over and depending upon your investments, that gain could be substantially higher. However, we will still be subjected to corrections. Right now, for example, as a result of this Christmas rally, all three indexes are over extended and in need of a pullback. This could occur as early as next week or later in the month. These mini-corrections are an inevitable cost of doing business in equity markets.
There is also a distinct possibility that later in the year the stock market will get ahead of itself. After all, markets vacillate between fear and greed. As the averages trend higher, investors tend to believe markets will go higher still. Valuations get out of whack or events occur that change the game and the markets correct. So don’t be surprised if I sound a note of caution as early as this spring. Rest assured that somewhere out there lurks another substantial pullback (greater than 10%). Hopefully, I will be on the job and lucky enough to identify it when it occurs.
However, for now, I see clear sailing ahead with only a few minor squalls in the stock markets. As for fixed income, clearly, interest rates have seen their lows in the U.S. Treasury and Municipal bond markets. That multi-decade Bull Run is over and investors would be well advised to steer clear of those areas. Commodities will continue to gain although this year I suspect precious metals will take a back seat to their more mundane cousins such as agricultural products, base metals and materials.
All in all, I feel as positive about the markets now as I did at this time last year. I guess the difference today is that I am expecting more people to enjoy the benefits of an economic expansion than ever before. And that is a real reason to celebrate so Happy New Year to you and yours.