Market Musings: Things Are Shaping up for 2011

The stock market is trading on the economic news of the day. Investors have nothing else to go on, but we are getting close to another earnings season. Next time around, it will be very important for the financial sector to do well. A good earnings performance from the banks and brokers will carry the stock market and set the tone for all of 2011. It’s time now for the financials to contribute to the cause. If they don’t, sentiment will take a big hit.

The market is also looking for the large-cap technology sector to do well. This was my expectation at the beginning of this year and many of the big technology companies didn’t grow that much in the first half. Business conditions got a lot better in the third quarter and the expectation is for a strong performance this fourth quarter. Companies like Oracle, Intel and Hewlett-Packard need to do well for the broader stock market to accelerate.

The year 2011 could be a very good year for stocks (if we don’t get any major shocks to the system like a new war or a country default, for example). Most big companies have already reported that business is getting better and their pricing power is improving. We have a very accommodative monetary policy and the outlook for the dollar is mute (which helps exports). We also have price inflation, which helps corporations quickly ramp up earnings.

For quite a while now, big companies have been bolstering their earnings by stringent control on costs. Many big companies are running very lean operations and any price improvement next year will go right to the bottom line.

We also have an investing marketplace that’s got the money to invest, but very few options to try and generate a reasonable return on investment. The returns on bonds and cash are miniscule, especially relative to inflation. Therefore, institutional investors are likely to keep pouring money into stocks, because they’ll really only break even with other assets.

The commodity price cycle remains intact and any correction in that sector would be an ideal new entry point. The price strength in a barrel of oil is actually a good thing from the macro point of view (not the consumers). Stronger futures prices in oil represent increasing investor confidence in the global economy and in the U.S. marketplace. We might see oil tick higher, close to $100.00 a barrel next year. Remember, prices for securities rise in anticipation of a new reality. In any event, we should get some decent price action in stocks in the first half of 2011.