Welcome to 2011 , which is already giving investors a warm and fuzzy feeling, with stock markets in rally mode and averages hitting post-recession highs during the first week of trading. Indeed, the feelings are a little too rosy for Common Sense's taste, which has often been wary of the Conventional Wisdom.
This year, CW abounds, and it's mostly buoyantly optimistic. As I've said before, the CW may well be right. But if it is, profit opportunities will be limited. It's when the CW turns out to be wrong that investors can cash in.
As usual, Common Sense doesn't make a practice of predicting the future, and the CW is all about predicting it. No one has perfected such a skill, and yet the exercise is often fascinating, especially at the beginning of a new year. And investing always involves some assumptions about the future, unknowable though it may be.
Last year, Common Sense proved unusually foresighted in this exercise , which emboldens me to venture another assessment of the Conventional Wisdom for 2011 and where it might be wrong.
Stocks
The CW responds to momentum, and after two years of double-digit gains, the CW is decidedly bullish, with many pundits again predicting a 10%-plus rise in the S&P 500 index. And there are solid reasons to be bullish, with consumer spending and sentiment on the rise, industrial production humming, and the Federal Reserve still in an accommodating mode. As I said last year, rarely have the stars been so aligned in favor of stocks.
That said, the pervasive bullishness makes me nervous, as it did last year at this time. At the risk of sounding like a broken record, I'll simply repeat what I said then, which was that the pervasive bullishness made me nervous. "I expect at least one correction of 10% or more this year, which will represent a buying opportunity... Once that's behind us, I expect the rally to resume, with modest gains by the end of the year." That's pretty much what happened in 2010, and it strikes me as a reasonable possibility this year, too. I recently raised some cash when the NASDAQ Composite hit my selling target . I had also issued a buy signal in May, when the market correction I had anticipated finally arrived. For 2011, I expect another modest correction, and gains in the 8-10% range by year-end. This may also be the year when large-cap stocks take the lead from small and mid-caps, and when a value orientation begins to overtake growth.
Interest rates
The CW is deafening that the historic post-Lehman brothers bond rally is over, and that interest rates are destined to rise in 2011. This makes me very skeptical. Where was this chorus in August or October, when bonds actually were hitting new highs and interest rates were at historic lows? To me, the problem with the CW is that bonds have already corrected. Shares of the iShares Aggregate Bond ETF, which tracks a broad fixed-income index, fell 2.6% over the last two months of the year, which by bond standards is a big move. I concede that interest rates remain very low, and long term, they pretty much have only one way to go, which is up. But I'll go out on a limb to say that interest rates will remain low for most of 2011, and that the big correction in bond prices is already over. I'd still be wary of long maturities, and stick to intermediate and shorter-term bonds and CDs. But I feel comfortable adding to bond holdings at current prices and yields. At least investors know they're not buying at a market peak, which for now is behind us.
Gold and commodities
Gold has been on a tear, hitting new highs during 2010, along with many other commodities. The attendant publicity has only made it more popular, and it's taken pride of place in locker room chatter, if the conversations I've overheard are any indication. All of this makes me wary. Given its limited industrial uses, gold has been a traditional safe haven during times of turbulence and an inflation hedge. I trust the Federal Reserve when it says inflation is in check and I see no signs of imminent economic chaos despite hand wringing by many over the size of the federal deficit.
Most commodities other than gold are another matter, since they have industrial uses. As the global recovery gains strength, I'd focus on commodity producers rather than the commodities themselves, and have recently recommended agricultural commodity producers like Potash ( POT ) and Mosaic ( MOS ) . Energy has also traditionally performed well at this stage of a recovery, and I've added to those positions. I've also maintained or expanded my holdings of commodity-oriented exchange traded funds.
International
After surpassing U.S. stocks for several years, international equities trailed the U.S. last year, and the CW is that the bloom is off foreign equities, especially China. Chinese equities were volatile in 2010, and the iShares FTSE China 25 Index Fund ended the year with a modest gain of just under 2%. I concede that the CW is much less pronounced here, but my sense is that foreign equities remain attractive, especially China. I also expect developed Europe to emerge from the shadow of the European debt crisis. Last year I recommended Japan as a contrarian move, and by at least one measure (the iShares MSCI Japan Index), Japanese equities yielded gains of nearly 10%. This year I see Germany taking center stage.
So here's to 2011: to continued economic recovery, higher employment, widespread prosperity — and plenty of investment opportunities.
Trackback URL for this story: http://www.smartmoney.com/tb/Jd.2Bt.2BNI.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
Report Spam/Abuse
Report Spam/Abuse
Report Spam/Abuse
Report Spam/Abuse
Unlike a simple calculator or worksheet, lifeplan provides step-by-step actions to help you put - and keep - your financial house in order.
This award winning column addresses estate planning, individual retirement accounts, long-term-care insurance and strategies for selecting variable annuities.
Read Full Article »