‘Tis the season of predictions. Although there’s never a shortage of forecasts, the calendar year’s finale typically shifts the prognosticating into overdrive. This year is no different. You can hardly swing a cat these days without hitting a fresh batch of prophesies for the year ahead. The trick, as always, is figuring out which forecasts have a decent chance of correctly describing the months and years ahead.
More is actually better when it comes to predictions. There’s an intriguing line of economic research that stretches back to the 1960s that demonstrates how combining forecasts is more reliable than focusing on the lone guess. Common sense, perhaps, but formally vindicated too. In any case, the insight inspires a broad look at what the pundits and analysts expect for 2011 and beyond, an art form that’s unusually fertile at the moment.
What follows is a random review of recent crystal-ball gazing in no particular order from a variety of people and institutions. A few of the specifics are arbitrarily highlighted, although you can read the unedited source material by clicking on the link. Meanwhile, hope springs eternal. So too do the usual caveats, including the warning that some of the forecasts that follow may actually prove to be accurate.
Mercer predicts top investment trends for 2011
Mercer Wealth/Dec 13
• As developed nations struggle with debt and credit remains tight, global growth will be driven by emerging economies. Considered too risky or difficult to access in the past, markets such as China and India now offer economic strength, positive demographic forces, improved governance, political stability and expanding capital market access – making them increasingly attractive to investors…
• Asset allocation and portfolio structuring will evolve and result in the creation of more robust portfolios… Sophisticated investors have responded by using more nuanced models, and supplementing the traditional ‘asset-class’ approach with one based on risk factors…
• More investors will exploit capital market deviations through medium-term asset allocation ‘tilts.’ The financial crisis emphasised that asset allocation is the key driver of returns, and in 2011, investors will continue to move from a static, long-term strategic asset allocation approach, to processes which adjust allocations according to their medium-term outlook.
Eleven Themes for 2011
Richard Bernstein (Richard Bernstein Advisors)/Dec 7
• The US Dollar Continues to Appreciate. Despite all the talk about debasing the dollar, the DXY Index has actually risen about 2% so far in 2010. In addition, most investors remain unaware that the dollar troughed in April… 2008! We expect the dollar to continue to appreciate in 2011…
• We expect stocks to outperform bonds in 2011 as the US economy continues to expand and as normal upward pressure on longer-term interest rates becomes more apparent.
• Gold Produces a Negative Return. Gold seems to be in a pure momentum market these days. Momentum markets are exciting, and the media love them, but they have a nasty tendency to fall faster than they rose.
Schwab Market Perspective: Cutting Through the Noise
Charles Schwab/Dec 3
• Economic data is rarely clear-cut, but we believe the weight of the evidence indicates a strengthening US economy, which should help to support stock-market performance in the coming year.
• The negative rhetoric surrounding the Federal Reserve’s recent decision reached a crescendo, but while we were among the first to voice our belief that it wasn’t necessary, we believe the dire warnings of potential consequences from a second round of quantitative easing (QE2) are overblown.
• The European debt crisis continues to plague world markets. We believe the European Central Bank (ECB) needs to be more proactive instead of continually reactive.
UBS global outlook: Key investment views
• Global economy divided in 2011
The global economy is becoming more fractured – not down the traditional lines of West versus East or Developed versus Developing, but the strong versus the weak. Record deficit levels, previously unheard of stimulus measures and uneven levels of economic growth will force many countries to make hard political choices to shape the investment environment in 2011.
• Equities our preferred investment
Equities are well-positioned for a year of accommodative central banks, are able to weather the risks of inflation better than most, and offer attractive value going into 2011. Companies that sell products or services, generate cash and have profit margins are unlikely to go out of fashion soon. We favor equities in the larger emerging markets (BRICs) and Core Europe, such as Germany.
• New rules: No major currency should be considered safe
“It’s the economy stupid” was once a popular slogan during the US presidential campaign in 1992, and is the economic reality for currency investors. The traditional Big Four currencies (USD, EUR, GBP and JPY) will be challenged in 2011. We recommend diversification, and many investors may wish to consider the currencies of commodity
producers and emerging markets.
U.S. Economic Perspective: Recent Rate Rise Reflects Growth Hopes, Not Sovereign Fears
Alan Levenson (chief economist, T. Rowe Price)/Dec 10
• Prospects for additional tax relief bolster our expectation of a gradual quickening of growth. If enacted, the proposed measures would add roughly 0.5 percentage points to real GDP growth next year.
• Against this backdrop, we view the recent rise in Treasury interest rates as a reflection of firming growth expectations, rather than as an aversion to the debt of a profligate sovereign borrower. As such, the backup in risk-free rates is not a threat to near-term economic prospects.
• At the same time, we are mindful of the intermediate-term risks associated with the wider fiscal shortfall that this policy choice entails, and reiterate that fiscal stresses cannot be viewed safely as only a long-term threat.
Investment Ideas for 2011
Morgan Stanley Smith Barney/Dec 2010
We believe high yield corporate bonds offer one of the more attractive risk/reward profiles in fixed income. A recovering economy, coupled with declining default rates, should improve the credit profile of the asset class over the coming year. To be sure, the high yield spread over Treasuries has come down a long way from the record-setting levels seen in late 2008 during the depths of the financial crisis. However, the current high yield spread of roughly 600 basis points remains attractive relative to its long-term average.
CFOs More Optimistic About Hiring in Annual Bank of America Merrill Lynch Outlook
Bank of America Merrill Lynch/Dec 9
Financial executives at U.S. companies expressed more optimism that their businesses will hire employees and see revenue growth in 2011, according to a recent Bank of America Merrill Lynch survey.
Of the 801 executives surveyed in the bank’s annual CFO Outlook, 47 percent said they expect their companies to hire additional employees next year, up from 28 percent who forecast hiring last year. Only 6 percent said they expect layoffs, compared with 9 percent last year. In addition, 64 percent of CFOs expect revenue growth in 2011, up from 61 percent last year…
Other notable findings in the survey:
• When asked what will have the biggest impact on the economy in 2011, CFOs ranked healthcare reform No. 1 at 54 percent, followed by the budget deficit at 52 percent and the housing market at 43 percent.
• Related to the above, CFOs’ top financial concern by far is health care costs, followed by revenue growth and cash flow. The top concern last year was revenue growth.
• Only 27 percent of CFOs expect the cost of capital to increase, compared to last year when nearly half of CFOs expected a higher cost of capital.
Predictions 2011: Michael Farr On Treasuries And Home Prices
Michael K. Farr (Farr, Miller & Washington via CNBC)/ Dec 1
• Interest rates on Treasuries rise. Interest rates on longer-dated Treasuries begin to rise as 1) deficits remain high due to tax cut extensions; 2) investors lose confidence in the government’s ability to address structural deficits (entitlement spending); and 3) commodity prices continue to rise. Central banks across the developing world will increasingly tighten to avoid runaway inflation. The Fed may attempt QE3 but will find that it has lost control of the Treasury market…
• Home prices will fall again. Housing prices will fall an additional 5-15 percent as mortgage rates rise moderately and foreclosure backlogs work through the system. Further home price declines will trigger more defaults and foreclosures as the percentage of underwater mortgages rises from the current level of about 25 percent. The government will be forced to address the deteriorating housing market through initiatives designed to support prices.
Top 10 economic predictions for 2011
Nariman Behravesh (IHS Global Insight) via ThisIsMoney/Dec 6
A two-speed recovery is likely to remain a salient feature of the global economy throughout 2011. The deceleration in growth that manifested itself in the latter half of 2010 will extend into the first half of 2011—for nearly every region and country in the world.
However, the global recovery should pick up steam in the second half of the year, as some of the worst-hit sectors (housing and autos) rebound and as consumer and business confidence improves.
Economists Predict Growth in 2011
The Wall Street Journal/Dec 13
Economists have grown more optimistic about the outlook for U.S. growth next year, predicting the expansion will accelerate as 2011 progresses, according to the latest Wall Street Journal forecasting survey…On average, the economists now predict GDP will grow 2.6% in the current quarter at a seasonally adjusted annual rate, up from the 2.4% growth they projected in last month’s survey. The economy grew 2.5% in the third quarter. The economists now see stronger expansion in the first half of 2011, with growth picking up speed as the year progresses. For the year, they expect GDP will rise 3%. Meanwhile, they have reduced the odds of a double-dip recession to 15%, the lowest average forecast of the year, from 22% in September survey.
Pimco Raises US Growth Forecast After Tax Deal
Pacific Investment Management Co, manager of the world’s largest bond fund, raised its growth forecast for the U.S. economy to between 3 percent and 3.5 percent for 2011 from its earlier estimate of 2 percent to 2.5 percent, Chief Executive Mohamed El-Erian told CNBC late Thursday.
Stock forecasters predict market gains in 2011
USA Today/Dec 10
The most bullish of the eight 2011 forecasts reviewed by USA TODAY comes from Barclays Capital strategist Barry Knapp. His base case for the Standard & Poor’s 500 index, a broad market gauge, is for it to hit 1420 by the end of 2011, which equates to a gain of 15% from Thursday’s close of 1233. He did not, however, rule out pullbacks along the way. “We are more optimistic than we have been at this time in each of the last two years,” Knapp wrote in his “Outlook 2011.”
His optimism stems from his belief that the economy will continue to improve, corporate earnings will keep growing and the Federal Reserve will stick to its ultra-easy interest rate policy. “We are optimistic about U.S. corporate profits,” Knapp wrote. He expects S&P 500 earnings to grow at a 9% clip next year.
“Before You Uncork The Champagne”: David Rosenberg’s 10 Themes For 2011
Business Insider/Dec 11
People are overbullish on U.S. equity. Consensus views of 1,350 on the S&P 500 and 4% real GDP growth are far too high. Not one strategist polled by Bloomberg is bearish on equities. So we have a complacency problem on our hands, the exact opposite of what we experienced at the March 2009 and the July 2010 lows. For that reason, the outlook for at least the first half of 2011 is less than positive.
Mark Zandi (chief economist of Moody’s Analytics) talks with Bloomberg News about the Fed and the outlook for the U.S. in 2011…