Sign in
Become a MarketWatch member today
Weekend Investor
Dec. 17, 2010, 5:23 p.m. EST
View all Weekend Investor "º
"¹ Previous Column
Three top 2010 sectors to own in 2011
First Take "º
The Countrywide albatross at B of A
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) "” Take a good look at the impressive gains that both U.S. and global stock markets posted this year, to many investors' pleasant surprise. You don't want to miss the repeat performance in 2011.
The third time's a charm, as the saying goes, and 2011 offers a trio of financial-market milestones. It's the crucial third year of the so-called presidential cycle, the beginning of the third year of the bull market that started in March 2009 "” all 10 bull markets since 1949 have celebrated their third birthdays "” and, in June, the start of the third year of agonizingly slow but still positive U.S. economic growth.
"It's going to be either a good year, or a great year," said Sam Stovall, chief investment strategist at Standard & Poor's Equity Research.
Buying the 10 highest-yielding Dow stocks and holding them for 12 months has rewarded investors with earnings growth and dividends, says financial adviser Kurt Brouwer, editor of MarketWatch's FundMastery blog.
That said, investors should never expect smooth sailing, especially now with so much doubt and disbelief surrounding the economic courses being set in Washington and Europe.
S&P's Global Investment Policy Committee cautioned in a recent report that "the very strong performances that are typically experienced" in U.S. markets during these third years "will likely be moderated by the aging of this bull market and the sluggishness of this economic recovery." The group's latest forecast puts the S&P 500 stock-index /quotes/comstock/21z!i1:in\x (SPX 1,244, +1.04, +0.08%) at 1,315 a year from now, less than 6% higher than its close of 1,244 on Dec. 17.
Before looking in-depth at what 2011 could deliver, how did our recommendations for 2010 fare? Solidly. In a bullish year for stock and bond investors overall, most of the picks made in January 2010 stood out. Read more: Ten money-making investment ideas for 2010.
Advice to buy large-cap U.S. stocks with a global footprint paid off. A basic S&P 500 index fund would have done the job, posting an average gain of 13% through Dec. 16, according to fund-tracker Lipper Inc. The index's components earn almost half of their revenues overseas.
Using stock dividends as bond substitutes was a lucrative tactic. For example, equity-income mutual funds, which tend to focus on dividend-paying stocks, averaged a 13.7% gain this year, Lipper reports. Steering away from long-term Treasurys also was on target.
Owning cyclical technology-, energy- and industrial-sector stocks was a good call. The S&P 500 industrials sector was up 23% this year through Dec. 16, with the average industrials-sector mutual fund gaining almost 26%. Meanwhile, the technology sector rose 9%, but many tech-focused mutual funds did much better, up 20% on average for the year. The S&P 500 energy sector rose 14%, in line with the average energy-stock fund.
Two tips you probably could have done without: An emphasis on large-cap stocks, which were steamrolled by small- and midcap rivals, and a bullish call on the U.S. dollar "” its exchange-traded proxy, PowerShares DB US Dollar Index Bullish /quotes/comstock/13*!uup/quotes/nls/uup (UUP 23.19, +0.10, +0.43%) , is finishing a highly volatile 2010 basically flat. Still, it beat a bet on the euro.
As signs point to investors taking more risk and moving back into stocks, the tea leaves for 2011 suggest that bulls will have more room to run, especially those in U.S. cyclicals. Plus, while small- and midcap stocks have strong support, large-caps could enjoy a larger share of the spotlight. As always, buyers will have to tread carefully, particularly bond investors.
Against this multihued backdrop, here are 10 ways to position your portfolio through 2011:
The Presidential Cycle is a four-year U.S. stock-market pattern with surprising consistency, regardless of the president or the party in office. This next year is the cycle's crucial third year, after the midterm U.S. elections and prior to the general election, which bodes well for the broad market.
Historically, the third year "” particularly its first six months "” has been the cycle's best, with the S&P 500 gaining 17% on average in the third year of the president's term since 1945, according to S&P. The top sectors in the third year since 1970 have been cyclical, chiefly technology, materials, industrials and consumer discretionary.
"We have never had the market decline in the third year since World War II," Stovall said. "The party in power wants to stay in power, so they stoke the engines of the economy in Year 3, which bears fruit by Year 4."
Economically sensitive companies were the U.S. market's strongest in 2010, and their momentum will likely continue. These businesses shine in the earlier stages of an economic expansion as corporate and infrastructure spending increases.
"The global economy continues to recover, and what leads the world economy are emerging markets and business spending," said David Bianco, chief U.S. equity strategist at Bank of America Merrill Lynch, who sees the S&P 500 at 1,400 a year from now.
That bodes well for the industrials sector "” including firms involved with construction, engineering, railroads, air freight and logistics, electrical equipment and machinery. Many U.S. industrial companies are multinational and so benefit from emerging markets' growth. Read more: Three top sectors 2010 to own in 2011.
One of Bianco's five favorite stocks for 2011 is United Technologies Corp. /quotes/comstock/13*!utx/quotes/nls/utx (UTX 78.80, -0.22, -0.28%) , a global titan with diverse units ranging from Sikorsky helicopters and Pratt & Whitney jet engines to Otis elevators. "It's a conglomerate without weak spots," Bianco said.
Sector investors can count United Technologies, along with General Electric Co. /quotes/comstock/13*!ge/quotes/nls/ge (GE 17.70, -0.07, -0.39%) , Caterpillar Inc. /quotes/comstock/13*!cat/quotes/nls/cat (CAT 92.59, -0.61, -0.65%) and United Parcel Service Inc. /quotes/comstock/13*!ups/quotes/nls/ups (UPS 73.06, -0.70, -0.95%) as mainstays of exchange-traded funds iShares Dow Jones US Industrial Sector Index Fund /quotes/comstock/13*!iyj/quotes/nls/iyj (IYJ 65.11, +0.03, +0.05%) and Industrial Select SPDR /quotes/comstock/13*!xli/quotes/nls/xli (XLI 34.54, -0.10, -0.30%) , to name two index-tracking options.
Materials stocks, focused around chemicals, industrial gases, fertilizer, containers and paper products, are tied to commodity prices and by extension, emerging markets growth.
Accordingly, U.S.-based materials companies are exposed to the fastest-developing areas of the world, and to sharp downside risk should commodity prices tumble. Strong demand from developing countries, coupled with the improved financial health of developed economies and rising global stock markets should underpin oil, metals and other commodity prices, according to Moody's Analytics.
Bianco's work favors what he calls "big international growth stocks," and in the materials sector that points to DuPont /quotes/comstock/13*!dd/quotes/nls/dd (DD 49.86, +0.41, +0.83%) and Praxair Inc. /quotes/comstock/13*!px/quotes/nls/px (PX 93.52, -0.34, -0.36%) The Merrill analyst also recommends Bemis Co. Inc. /quotes/comstock/13*!bms/quotes/nls/bms (BMS 33.10, +0.29, +0.88%) and Owens-Illinois Inc. /quotes/comstock/13*!oi/quotes/nls/oi (OI 29.97, -0.27, -0.89%) in the containers and packaging area.
Expectations for the technology sector are highly favorable, with 80% of money managers bullish on the business, according to a recent Russell Investments survey.
While some might see that as a screaming "sell" signal, global business investment in computer, software and communications equipment is higher, and consumers' love affair with tech gadgets continues unabated.
Overall, the tech sector, with its large percentage of foreign sales, is enjoying record profit margins and positive analyst earnings revisions. Buying the "Tech Titans" is one of Bank of America Merrill Lynch's key investment ideas for 2011, with International Business Machines /quotes/comstock/13*!ibm/quotes/nls/ibm (IBM 145.00, +0.45, +0.31%) and Google Inc. /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 590.80, -0.91, -0.15%) serving as poster children for the theme.
Merrill and Countrywide, deals made when the bank appeared to under appreciate the gravity of the financial crisis, continue to be an enduring legacy of the wrong kind at B. of A.
11:39 a.m. Dec. 16, 2010
"Technology #stocks edged higher Friday, as shares of Oracle Corp. jumped nearly 4% http://bit.ly/hDVuxD" 6:16 p.m. EST, Dec. 17, 2010 from MarketWatch
"President Obama signs $858 billion tax-cut extension into law http://on.mktw.net/dEM2tM" 4:30 p.m. EST, Dec. 17, 2010 from MarketWatch
"Dow ends down 7 points Friday; blue-chip index paces weekly advance with 0.7% gain http://on.mktw.net/ebeNji" 4:06 p.m. EST, Dec. 17, 2010 from MarketWatch
"More news! #FF @mktwasia @mktweurope @marketwatchgame" 2:50 p.m. EST, Dec. 17, 2010 from MarketWatch
"Spanish businesses keep struggling for survival http://bit.ly/ijNu9u" 2:32 p.m. EST, Dec. 17, 2010 from MarketWatch
Indexed Investor
Stock market's big 2010 surprises
Ethics Monitor
Science, politics don't need any more mixing
Read Full Article »