First Night is over and the ice sculptures have melted. The Outback Bowl is history and Christmas trees are coming down in Centre County. Memories of the past year are fresh, but our sights are set on 2011. What is the final call on the markets and where are they heading next?
The past year, especially the last quarter of 2010, was positive for the stock market. Commodity-related companies finished especially strong. Many commodities are substances that are mined from the earth and are equally valued despite who extracts them. Examples of fast-moving commodities are gold, silver and copper.
The American stock indices had great gains, too. The Dow Jones Industrial Average, which consists of 30 large, publicly traded American companies, had a return of 11 percent for the 2010 calendar year. The amazing part is that the largest gain for the Dow came in December with a five-percent jump in the average. The Standard & Poor’s 500, which is the best gauge of large capitalization stocks in the U.S., clocked in a gain of 13 percent for last year.
Even more encouraging are the returns for small capitalization stocks (typically those under $5 billion), which are reflected in the performance of the Russell 2000. The Russell 2000 consists of 2000 of the smallest U.S. securities and rose a whopping 26 percent in 2010. The final widely followed index is the Nasdaq, which gained 17 percent in 2010. The Nasdaq comprises mainly technology stocks and was led by Apple (AAPL), maker of the iPhone and iPad, and Amazon (AMZN), maker of the Kindle e-book.
Will the markets be as positive in 2011? As I tell many people who ask me, if I had the Jan. 1, 2012, Wall Street Journal, I could tell you with certainty. The fun part is all the contradictory predictions made for the year. For example, in Barron’s (a weekly financial publication) online edition there were two articles immediately adjacent to each another. The first was titled “Signs of a Top?” by Alan Abelson and the second was “A Major Top Unlikely Soon” by Michael Santoli. Two respected and knowledgeable people were calling it in two completely different ways.
The reality is there are major factors that will aid the market’s 2011 performance. The tax bill, which extends the Bush-era tax cuts and decreases Social Security withholding for this year, will put more money in working people’s pocketbooks. Hopefully, this will increase consumer spending. In addition, Quantitative Easing Round 2 (QE2) is in the works. This will flood the financial systems with money for lending and business activity, which should further support the U.S. economy.
Another set of good news that bodes well for the market is small-business sentiment. Small businesses are more positive and are even beginning to hire. Small-business expansion usually leads any recovery in employment.
All these factors guide us toward believing the markets will continue their move upward with volatility. Still, there are headwinds slowing our economic recovery and the stock market in general. The U.S. unemployment rate is still at 9.4 percent.
Europe’s sovereign debt crisis could cause damage to the global economy. Many European nations such as Portugal, Italy, Ireland, Greece and Spain (the so called PIIGs) are mired in debt and fiscal challenges, making them likely to default on their national debt. Increasing the spread of the problem is the common currency used by almost all European countries, the Euro. This is why Germany has been willing to help its Euro brethren: so that its own currency remains stable.
Here at home, U.S. consumers are still working through their debt issues, which leaves less for retail. Finally, inflation may rear its ugly head with the onset of QE2. Inflation can eat away at the dollar’s buying power and lead to much higher interest rates that are designed to fight it.
The question is, where do we head now with our money? The rule that has always worked for me is to pay attention and ride the trends. Right now the stock markets are doing well. Bonds are getting smacked due to the QE2 and the anticipation of rising interest rates. Cut your losses quickly and be cognizant of breakdowns or changes in trends so you don’t get caught up in a downturn.
Pay close attention to earnings—and earnings surprises—so that you’re holding good companies with a solid bottom line. This is key when aiming for a (financially) happy new year.
