As we make the transition from 2010 to 2011, what can we expect for the coming year and how can we, individually, benefit from the opportunities that lay ahead? The extension of the Bush tax cuts, increased tax deductions for businesses, payroll tax reduction and raising of the estate tax exemption has created a pivotal change among business owners, executives and investors. The markets that once were driven by pessimism and fear have given way to optimism and hope.
Here’s a summary of my outlook for 2011 along with how you can best benefit from the opportunities presented:
Stock Market. The stock market peaked in October 2007, then came crashing down in 2008 losing 37% by year end as the financial markets side-stepped a near Armageddon. In 2009, the stock market rebounded sharply gaining 26%, followed by a strong year-end performance resulting in a 15% gain for 2010. Even with excellent returns for 2009 and 2010, the stock market remains 14% below its October 2007 peak.
All signs point to excellent returns for 2011. Both public and private companies have used this recession to slash expenses and raise cash. As the economy improves increased revenues should quickly translate into increased profitability. One of the nations largest investment firm’s prognosis is for a 15% return.
Opportunity: Review your investments with an eye towards stocks. Dividend-paying blue chips; small caps and emerging markets should do well.
Bond Market. At some point during 2011, longer term interest rates are likely to begin a multi-year trend towards rising rates. As interest rates rise, bond values will fall. Couple this with rising default risks for lower quality municipal bonds suggests caution for the bond market. Many states such as California and Illinois as well as cities across the country are facing serious financial peril and will either be looking for federal bailouts, extreme expense cutting or bankruptcy. We expect the Federal Reserve to stand pat on short-term rates during 2011.
Opportunity: Review your fixed income investments to make certain you are holding higher quality bonds. For mutual funds, consider funds where average maturity is less than five years.
Inflation. The Federal Reserve is pumping billions of dollars into the system. Historically what follows this quantitative easing is inflation. You’ll likely notice it first at the grocery store and the gas pump. Runaway inflation is unlikely as long as employment remains at the current levels.
Opportunity: If you believe inflation will rise significantly over the next several years, conservative investors should consider TIPS bonds. These are treasury bonds whose total returns are tied to inflation.
Housing. It will take a number of years to solve the current problem of oversupply in the housing market. However, expect the turning point to occur during 2011.
Opportunity: Housing prices remain extremely competitive. If you’re in the market for a new home, now’s a good time to buy.
Unemployment. Expect little improvement in reemployment during 2011. As companies see revenue growth, many will look to technology solutions rather than human ones.
Opportunity: If you are unemployed, develop a financial crisis management plan immediately. Cut expenses and consider starting a business or taking a ‘suboptimal’ job until the job market improves which will likely take 2-4 years.