Weekend: 2011 Stock Market Forecast
Wealth Daily's Weekend Edition
*Editor's note: For a more up-to-date report, read Wealth Daily's 2012 Stock Market Forecast
Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.
It’s not often that Bloomberg's headlines give me much pause, but this one sure did.
Bullish to the max, it quoted an analyst named Brian Barish from Cambiar Investors who believes the S&P 500 will gain 17% from here.
In fact Barish believes the S&P 500 will rise to 1,300 by June 30, and to 1,380 by the end of year based on the weighted average of estimates by Cambiar’s nine analysts.
Propelled by energy and industrials, 2011 will be marked by a “multi-speed recovery” that will completely lay waste to the “new normal” thesis put forward by the likes of PIMCO and your humble analyst.
Instead, Barish believes, “the bleeding has stopped” as low market multiples will give way to an environment where multiples expand.
In short, it's the classic bullish argument, since the price-to-earnings ratio is now 15 — below the 16.4 average for the index going back to 1954.
But as every market watcher knows, Barish’s thesis eventually comes to rest where all of them do. In the end, it will always be all about earnings.
That’s why we aren’t so eager to help ourselves to all of this bullish Kool-Aid talk of late — especially as Goldman Sachs boosts their outlook to 1450 (!!) for 2011.
Now for those of you keeping score at home, Goldman's latest forecast would put the S&P 500 right back within a whisper of its 2007 highs, going back to the days of the housing bubble peak.
How they arrive at that figure, I’ll never know...
After all, is there anything that leads you to believe we are going see to the type of real economic activity we witnessed before it all fell apart?
A return to the 2007 peaks?
I would even argue the two-year peaking cycle — circled in the chart below — was nothing more than an illusion brought on by cheap credit and the bubble atmosphere it created.
Without them, in other words, that peak encompassed by the circle never would have happened.
In many ways, it really was mirage.
Simply put, the market overshot at the top the same way it overshot at the bottom. It was, in the purest sense, a function of our bubble-based economy — similar to the market action after the dot-com bust.
Of course, that doesn't mean another stock market bubble cannot form anew. The FED is actually working overtime to create one, which is where these bulls may get it right... eventually.
However, it's hard to believe those conditions exist yet, as evidenced by last week's awful jobs number.
All told, the U.S. economy added only 39,000 jobs in November — the lowest number since September, according to the Labor Department. What’s more, the unemployment rate rose to 9.8% after holding at 9.6% for several months.
That total fell far short of expectations; most economists had forecast a gain in payrolls of 150,000 jobs, with some even going as high as 200,000. It was a huge miss.
Which brings us back to our ultimate market stumbling block: It’s all about jobs, jobs, and jobs. Don’t let anyone try to convince you otherwise.
The economy needs to create 232,400 jobs each month for the next 60 months just to get to the same unemployment rate last seen in December 2007, or the rate within the peak (enclosed by the circle above).
That just isn’t going to happen any time soon, especially not within the next 12 months.
In fact, real economic growth rates of 2.2% or less are likely through 2011 — falling far short of the 3.3% growth we need just to keep up with population growth.
2011 stock market forecast
That leads me to believe the markets will remain range-bound, trading between 1100 and 1300 on the S&P over the course of the next year.
As this chart indicates, that would be similar to the way the market behaved in the in that aftermath of the dot-com fiasco:
For DOW watchers, that puts our expected range roughly between 10000 and 12000 — extending the mid-range of sideways trade going all the way back to the turn of the century.
As for the bulls arguing for a quick return to the bubble heavy highs, I just don’t see it.
Needless to say, it promises to be another interesting year. Not bad… not great… but somewhere in between.
In the meantime, investors are going to have to choose wisely in 2011 to beat the market averages. You'll find a few of the best investment ideas from the pages of this week's top-read Wealth Daily and Energy & Capital below.
And if you're interested in perusing my 2010 stock market forecast, you can find that here. Without beating my chest, I called for 1220 as the high on the S&P in 2010. At the time, the S&P was trading at 1091...
Have a great weekend.
Your bargain-hunting analyst,
Editor, Wealth Daily
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