It’s increasingly likely that stock prices will keep their positive bias going into 2011. That is, if there isn’t a major shock to the system like a new war or sovereign debt default. At the end of the day, the earnings picture, along with accommodative monetary policy, is supportive of rising stock prices. Goldman Sachs just predicted a solid year for stocks next year and the firm favors technology, cyclicals and commodities. They forecast that gold prices will keep ticking higher, but the price rise will slow in 2012, as the Fed begins to raise interest rates.
I’m still worried about the sovereign debt issue in Europe. This kind of risk can linger for a long time and come out of nowhere to kill a bull market. Equity investors have been patient for a number of years now and we’re all looking for a new cycle to rally around. The stock market goes up in anticipation of the future, so don’t be surprised if the broader market rallies even in the face of weak employment and housing numbers.
Practically speaking, a great way for an investor to play a 2011 rising stock price scenario would be to just invest in the index and then trade individual stocks as the opportunities arise. While history shows that small-caps tend to perform best coming out of a recession, I’d have a tendency to stick with large, dividend-paying stocks if I was a new buyer. No matter what the stock market does over the coming quarters, investment risk remains high.
I usually don’t like the buy high and try to sell higher investment strategy, but I think investors can do this with resources. If the Federal Reserve is going to entertain more monetary stimulus, then the outlook for the dollar remains weak. Real assets like oil and gold should continue to move higher in the current environment and there’s no doubt they are attractive momentum plays. Naturally, any equity portfolio should already have some exposure to these commodities.
Last quarter, corporations said that they expected their businesses to get better in the fourth quarter and going into 2011. Many cyclical companies reported that they were actually able to increase their selling prices without affecting demand for their products. This is always a good sign.
One key sector to keep an eye on is in transportation. In fact, if you want to know where the broader market is going, all you have to do is follow the railroads. Right now, most of these stocks are hitting new 52-week highs and several are hitting new all-time record highs. I suppose, this is as good a signal as any.