The year opens on a strong note, with many convinced the worst is behind us. But will rising interest rates and prices cool off this optimism as 2011 rolls on?
After a relatively quiet end to 2010, the new year has begun with a roar, and investors seem overwhelmingly bullish.
Once again, people appear to be concluding that a lot of problems are about to be solved, when that may not be the case at all.
What economists expect for 2011
But at some point I expect higher interest rates will hurt both the economy and the stock market. In addition, we are not out of the woods with regard to the real-estate market, which I believe has another leg lower to deal with, both as a function of higher rates and as a consequence of banks finally being forced to face some of the realities on their balance sheets that their "extend and pretend" strategies have thus far allowed them to avoid. Wall Street's laws of attraction As for commodities, the first week of trading tested the nerves of those investors who find them attractive. Not only has the market for "stuff" been weak, but all forms of highflying, speculative, momentum-oriented equities have performed well.
I suspect this is doubly hard on the psychology of the commodity investor, since those who tend to be bullish on commodities are probably inclined to believe stocks should have been hit already. After all, in many cases the reason they own commodities is that they believe the stock market is mispriced (for a variety of reasons).
However, this is what often occurs in markets. The things you like get sold, and the items you don't like are embraced. Occasionally, it works the other way around, but it certainly seems more common for the assets you own to act in a way that tests your mettle. Meanwhile, ideas that make no sense, and in which you have no confidence, continue to levitate.
I wish I could explain why that is the case, but I can't.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=ff8d86ef-2697-42d1-845e-c5b3a5ca0e19,2643877b-82ff-4ad1-9759-0f592e20c407,1b59442e-281a-4364-8baa-79076e868f92,529e3925-6e34-4ba1-8c29-aef81140a251,36b5870f-890c-461d-9270-295aa06e1481", "player.fr": "iv2_en-us_money_article_16x9-xxx-xxx"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=ff8d86ef-2697-42d1-845e-c5b3a5ca0e19,2643877b-82ff-4ad1-9759-0f592e20c407,1b59442e-281a-4364-8baa-79076e868f92,529e3925-6e34-4ba1-8c29-aef81140a251,36b5870f-890c-461d-9270-295aa06e1481;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4'); On a related note to said bullishness, it does seem that more and more pundits seem to think that the Federal Reserve is looking for reasons to end its second round of bond buying, also known as "QE2."
Of course, I think a lot of those same folks thought the Fed was going to exit its first quantitative easing program early, which it was unable to do. In the release on Jan. 4 of the December Federal Open Market Committee meeting minutes, the Fed noted that it saw the economy not improving fast enough to alter QE2, and I think it very unlikely that the Fed will terminate QE2 prematurely, especially with interest rates rising. Who says food and oil don't matter? Nonetheless, people's (shifting) views regarding the Fed's likely course of action, and other financial matters, do have an effect on markets. Just look at how many are willing to ignore the price of food and energy when it comes to inflation statistics. Oil is nearly $90 a barrel and, as I write this, the U.N.'s Food and Agricultural Organization has taken note that food prices are now rising faster than they were in 2008, before the financial world nearly came to an end.
It is hard to imagine two things that are more integral to daily life than food and energy. But the fantasy continues that they should be excluded from inflation calculations because they don't directly tie into government money-printing. On the other hand, what does? Virtually nothing except bonds, and perhaps, by extension, stocks.
It is not debatable that money has been conjured out of thin air all over the world, and it is finding its way into the price of myriad goods. Mother Nature has a hand in pricing when it comes to agriculture, but money-printing exacerbates whatever occurs.
However, in spite of "official" views on inflation, the bond market has been sensing something, as it continues to decline from the highs it set before QE2 commenced. At some point, the Fed's life is going to get much more complicated, as it will for those who are now blindly piling into stocks. If I had to guess, I would say that those who are extra bullish on the stock market are going to be disappointed, and I would not be at all surprised if 2011 ended up being a negative year for stocks and bonds. 'What is' trumps 'what if?' That said, I don't base investment decisions on predictions, because they are rather useless in terms of making (and managing) money. What is far more effective is to be aware of what the major problems are and be alert to signs they are actually beginning to matter.
In other words, reacting to the fact that people have begun paying attention to concerns that had previously been ignored is far more profitable than having some big prediction and sticking to it. It can be very painful to invest based on an adamantly held view that such-and-such should be happening just because you have identified a particular problem.As we have seen, long-festering issues take some time to manifest themselves, whether it was the insanity of the equity bubble, the even greater insanity of the real-estate bubble or the brewing lunacy of trying to print our way to prosperity. Looking across the pond, the problems with Greece were well-known to those paying attention, but the problems didn't matter until they suddenly mattered to everyone.
In short, I think 2011 is going to be a tough year for financial assets, regardless of how it begins.More from MSN Money
Keep an eye on gold, bonds in 2011The next big 401k washoutSay goodbye to the bond bull market 10 money-making ideas for 2011Fed's power of the press hits limitRate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=6.042683; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=328;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board Research CurrenciesCurrency ratesCross-currency tableCurrency converterCurrency ETFsPowerShares DB US Dollar Index Bullish (UUP) PowerShares DB US Dollar Index Bearish (UDN)CurrencyShares Japanese Yen Trust (FXY)CurrencyShares Euro Trust (FXE)CurrencyShares Swiss Franc Trust (FXF) CurrencyShares British Pound Sterling Trust (FXB)Find more ETFsResearch a companyGet a stock quote.
Enter symbol or company:Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 1CommentNewestOldestBestWorstControversialgb500Sat 1:35 PMUntil Washington figures out that Wall Street is not connected to Main Street this country is going to be in trouble.Main Street bailed out Wall Street and the Banks now,neither is going to help main st.Banks and government are going to have to really help small business not talk about it.Small business is going to save this country not GM, Chrysler or these large companies that main st bailed out as well.Small business are the mom and pop business's companies that employs less than 50 people.Is this that hard to figure out. 0 0ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. 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In the release on Jan. 4 of the December Federal Open Market Committee meeting minutes, the Fed noted that it saw the economy not improving fast enough to alter QE2, and I think it very unlikely that the Fed will terminate QE2 prematurely, especially with interest rates rising. Who says food and oil don't matter? Nonetheless, people's (shifting) views regarding the Fed's likely course of action, and other financial matters, do have an effect on markets. Just look at how many are willing to ignore the price of food and energy when it comes to inflation statistics. Oil is nearly $90 a barrel and, as I write this, the U.N.'s Food and Agricultural Organization has taken note that food prices are now rising faster than they were in 2008, before the financial world nearly came to an end.
It is hard to imagine two things that are more integral to daily life than food and energy. But the fantasy continues that they should be excluded from inflation calculations because they don't directly tie into government money-printing. On the other hand, what does? Virtually nothing except bonds, and perhaps, by extension, stocks.
It is not debatable that money has been conjured out of thin air all over the world, and it is finding its way into the price of myriad goods. Mother Nature has a hand in pricing when it comes to agriculture, but money-printing exacerbates whatever occurs.
However, in spite of "official" views on inflation, the bond market has been sensing something, as it continues to decline from the highs it set before QE2 commenced. At some point, the Fed's life is going to get much more complicated, as it will for those who are now blindly piling into stocks. If I had to guess, I would say that those who are extra bullish on the stock market are going to be disappointed, and I would not be at all surprised if 2011 ended up being a negative year for stocks and bonds. 'What is' trumps 'what if?' That said, I don't base investment decisions on predictions, because they are rather useless in terms of making (and managing) money. What is far more effective is to be aware of what the major problems are and be alert to signs they are actually beginning to matter.
As we have seen, long-festering issues take some time to manifest themselves, whether it was the insanity of the equity bubble, the even greater insanity of the real-estate bubble or the brewing lunacy of trying to print our way to prosperity. Looking across the pond, the problems with Greece were well-known to those paying attention, but the problems didn't matter until they suddenly mattered to everyone.
In short, I think 2011 is going to be a tough year for financial assets, regardless of how it begins.More from MSN Money
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