Stock Market/Investing 2011 Prognostics

Wall Street Expects Stock Market to Rise 11 Percent in 2011

By Carla Fried | Dec 14, 2010 |

  • The Federal Reserve’s quantitative easing policy and the pending tax deal are plenty controversial for their long-term impact on the economy and our federal balance sheet. But Wall Street has decided it’s all good — really good — for the stock market over the short term. According to leading market strategists surveyed by Bloomberg News, the consensus is that the S&P 500 will rise to 1,379 in 2011. That’s a nice fat 11 percent gain from where the benchmark index sits today. Goldman Sachs strategist David Kostin — deemed the most accurate market caller so far this year by Bloomberg — is leading the bull charge with a forecast of a 17 percent gain for the S&P 500 in 2011.


What’s Behind All This Bullishness?


Who says perfect storms have to be about bad news? There are several different elements behind these optimistic forecasts:

  • Stronger than (previously) expected GDP growth. Double-dip recession? Nevermind. That talk has been pushed aside. Now, thanks to the recent stealth-stimulus tax deal, market watchers are eyeing a strong pickup in GDP growth. Moody’s Analytics economist Mark Zandi said last week we could see 4 percent GDP growth in 2011. And Mohammed El-Erian, CEO and co-chief investment officer at Pimco, says the House of New Normal now expects the economy to grow at a 3 to 3.5 percent pace next year, a full percentage point above its previous call.
  • Corporations have money to burn/invest. Amid the backdrop of a solid economic recovery Goldman Sachs’ Kostin says he expects corporations to finally start spending their $1 trillion cash hoard. But don’t read that as a sign we’re likely to see a hiring spree. Instead, Kostin says he expects the fastest growth in acquisitions and share repurchases.
  • We’re complying with Bernanke’s wishes. One of the goals of the Federal Reserve’s QE2 policy was to encourage us to let go of our death grip on bonds and invest more in stocks. The theory being that as the stock market rises, corporate America piles up even more cash it can deploy and we’re all left feeling more confident about things in general — the so-called virtuous cycle. So far, that’s exactly what is happening. Stock funds are suddenly taking in more cash than bond funds — which have experienced their first outflows since 2008 — and the stock market is up 11 percent in the past month.
  • Individual investors are feeling pretty good. According to the most recent investor sentiment survey from the American Association of Individual Investors, the gap between the bulls (53 percent) and the bears (22.6 percent) is at a four-year high.


Curb Your Enthusiasm

A few words of caution seem especially important right about now. For starters, the AAII survey is actually a pretty decent contrary indicator. To be blunt: You and I have a knack for being wrong about where the market is headed. Birinyi Associates ran some numbers recently for The Wall Street Journal and determined that when the gap is widely in favor of the bulls, 55 percent of the time that has been a sign of a market peak. (Interestingly, we’re far better at predicting market bottoms; when we are our most bearish, that has signaled a market bottom about 80 percent of the time.)

Moreover, if there’s one thing we apparently are good at, it’s chasing performance in a way that hurts our portfolios. According to Dalbar, individual investors have consistently underperformed market averages thanks to mistimed moves in and out of funds.

So this is where I am obligated to suggest you keep your eyes firmly set on your long-term asset allocation goals. Sure, if you want to give a little extra tilt to stocks given the bullish expectations, go right ahead. But a small tweak — say 5 percentage points — and not a wholesale shift, OK? And make sure that within your stock portfolio, there is still a rational allocation strategy at work. According to EPFR Global, emerging market stock funds have gotten the lion’s share of new money in 2010, and are on pace to hit a record of $90 billion in 2010. Inflows to emerging markets funds are the light-blue blue line in the graph below that dwarfs inflows to all other asset classes:

While emerging markets are indeed where the global growth is, it is also where the newest bubble may be forming. Just something to think about before you back up the truck and load up on the hot market segment.

And remember that Wall Street is all about what works this quarter, and maybe the next few quarters after that. Long-term is not on its radar. So while the 2011 forecasts are indeed portfolio-friendly, your retirement, or college fund, or whatever you’re investing for, needs to work over the long term. And the outlook beyond 2011 is a tad murkier. Much like with the first-time homebuyer credit and the cash for clunkers programs, Washington is hoping its short-term stimulus will get things rolling. But once the impact of QE2 and the tax deal plays out, there’s no guarantee the momentum will carry forward. We’re still left staring at a gaping federal deficit and an unemployment rate that no one expects to fall below 8 percent any time soon.

As Pimco’s El-Erian recently warned about the tax cut deal, “the new normal is still here…What the policy makers are doing is kicking the can down the road in response to the symptoms of the new normal, but they’re not yet changing the medium-term dynamics.”

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