2011 Economic and Investment Forecast

Investment managers oftentimes rely on forecasts in helping them manage portfolios.  We, the Wealth Management Department of the State Bank of Cross Plains, are no different.  To that end, however, we have compiled our own forecasts based on the forecasts of many of the economic and investment publications and firms that we follow and/or work with.  Here are the basics of our 2011 Economic and Investment Forecast…..

ECONOMIC FORECAST

We expect modest GDP growth that is slightly slower than Federal Reserve estimates of 3.0% to 3.6%. Our estimate is in the range of 2.5% to 3.5% but we expect mid-range at best. This is somewhat less than the 3.5% to 4.5% growth typically seen at this point in the economic cycle.  Expectations are for continued, and sustainable, global growth with continuing concern over fiscal policies in several countries in Europe and elsewhere. 

Our expectations for 2011:

  • GDP will grow around 3.0% for the year;
  • Policy makers will continue to deal with the current economic situation and will begin to focus on long term fiscal issues in the second half of the year;
  • The economy may face some headwinds should policy makers focus too much, too soon on long term fiscal issues;
  • Unemployment will likely drift lower to 9.25% to 9.5%; Interest rates will hold relatively steady due to little or no Fed action;
  • Core inflation will increase slightly to around 1.5% while food and energy prices will see more significant changes;
  • The U.S. dollar will decline slightly against foreign currencies but the threat of a currency war will help soften the decline;
  • Consumer and business spending will pick up slightly.

 

EQUITY MARKETS

Our expectation is consistent with most planners in that we expect high single digit returns for the S&P 500 and would expect other averages to post similar returns. Recent surveys indicate that most financial planners and investment advisors are bullish on stocks this year and look for the S&P 500 to reach 1373 which would be an approximate 9.2% gain. Why? Several factors weigh in, including concerns over the bond market, a stronger economy, and stock valuations that are below long term averages. Stocks should benefit from fund outflows in bond funds into equity funds as the economy heats up and fears over rising interest rates take hold.

Our forecast for 2011:

  • Most financial planners and investment managers bullish on stocks;
  • S&P 500 end of year target of 1373 which is approximately a 9.2% gain;
  • Corporate earnings will grow by approximately 10%;
  • Earnings comparisons will be difficult;
  • Large, multinational corporations will lead the way;
  • Tech, energy, and industrials will be leading industries;
  • Commodity prices, including oil, will increase;
  • Dividend paying stocks will outperform.

 

FIXED INCOME MARKETS

The long term downward trend in interest rates likely reached its low point in 2010 as key interest rates as set by the Federal Reserve hovered near zero. The party began to show signs of ending late in 2010 as treasury and municipal bond prices fell even after the Fed announced QE2. While no one is expecting large jump in interest rates, the firming economy will likely raise expectations of interest rate hikes. The threat is not just in the actual raising of interest rates but in the heightened expectations.

We expect the following in 2011:

  • Interest rates not likely to move dramatically higher;
  • Upward ticks in inflation and interest rates will occur later than earlier;
  • Fixed income return expectations should be lowered and returns will primarily be determined by yield;
  • Slowly growing economy should prevent a bond bubble bursting scenario;
  • Corporate bonds preferred over treasuries;
  • High yield securities will be main source of additional yield;
  • Opportunities will be available in muni markets but budget problems do pose some risk;
  • Extending duration may be more valuable than taking on more risk;
  • Use of alternative tools such as TIP’s and floating rate securities provide some protection.

 

We look forward to seeing how 2011 turns out and how our forecast does.  As always, we look forward to your thoughts, questions, and suggestions.

Happy New Year!

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