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2011 Market Outlook
All signs point to 2011 being a good year for the stock market. On this week's Money Matters, financial commentator Greg Heberlein tells KPLU's Dave Meyer this is a good time to invest.
-- Everything points to a high-flying year for stocks. The economy is improving, the stock market itself has gotten up off its knees, and the investment community offers a uniform chorus – now is the time to invest.
-- Anything wrong with that picture? Not if you have a longer-term outlook. The third year of a President’s first term is always the best for stocks in the four-year election cycle. On average, stocks rise nearly 20 percent in the third year, which is what it is for the Obama administration.
-- Both Wall Street and a lot of non-Wall Streeters know that. Aye, there’s the rub. When all investors move in one direction, or expect a move in one direction, the diabolic stock market often throws a curve ball and reverses. So let’s say it likely will be a good year. But with all the sentiment starting out so rosy, maybe the big gains will come later in the year, after the optimists experience a reversal.
-- So the latest coming of the bull market continues, only with a temporary respite. With many banks still at death’s door, with construction and real estate companies falling like flies, with foreign economies on the brink, a little breather might make sense.
-- Since the economy will continue to advance, hints of inflation will recur. That means interest rates will rise, a good thing for long-suffering consumers getting short-changed by microscopic returns on savings accounts. But higher interest rates will penalize those already holding low-interest bonds. So the outlook for bondholders is not negative. That’s good for stocks, which should .blossom as bond investors switch.
-- But a little inflation is good for stocks. In fact, inflation as high as 5-7 percent, which we’re nowhere near, is paradise for stockholders.
-- So, if a pause is to occur, it should come quickly. The all-clear signal may not be far away. Where, then, should investors go?
-- Assuming individual investors come back to Wall Street – and they haven’t since Wall Street stripped them of so many of their worldly possessions in recent years – a cautious toe in the water makes sense.
-- Reluctant investors should forgo overseas as well as overvalued U.S. stocks. They should embrace investing conservatism. To many, that means larger-company stocks, such as those in the Dow Jones industrial average. But which ones? We have an answer.
-- There is an often overlooked dictum among investors that says what was bad last year is likely to do better this year than what did well last year. That has proved often true in mutual funds and it works as well in stocks.
-- The Dow contains 30 of the biggest, most stable companies . Even though the Dow gained 11 percent last year, four of the 30 stocks lost at least 8 percent. Investors would be wise to evaluate those four and pick what they deem the safest plays. Those four are Microsoft, Bank of America, Cisco and Hewlett Packard. Three others that fell by lesser margins were Johnson & Johnson, Alcoa and Pfizer. In fact, those seven would make up a fairly diversified portfolio with good prospects.
-- Another batch to consider is stocks flung out of the Dow in recent years. Looking at the five stocks expelled in the past three years, the average gain was 1 percent. That won’t match the Dow, but it embarrasses the five new stocks, which lost an average of six and a half percent. The five stocks dumped since early 2008 are Altria, Honeywell, AIG, Citigroup and General Motors.
-- Happy investing!