You know I like to check in on the big picture every now and
again. It's the big trends that dictate the environment small
companies exist in, and without a big picture perspective it's easy
to get lost in a sea of information.
The end of the year means a lot of investment banks publish
their next year outlook. While the timing of this is primarily
driven by marketing (what's really significantly different about
2010 and January 1
2011 other than a different calendar year?), these reports still
give investors an opportunity to check in on what other analysts
see coming down the pike.
For the most part these firms are calling for healthy gains in
equities over the next year. Bank of America anticipates the
S&P 500 to rise 15 percent, Credit Suisse predicts 10 percent,
and Goldman Sachs expects a 19 percent jump.
There are a few consistencies between these reports. Most call for
U.S. GDP to increase due to the Fed's QE 2.0 program, rising from
around 2.5 percent to around 4.5 percent in 2011.
The availability of 'easy money' - i.e. low interest rates - is
expected to keep the dollar down, thereby spurring commodities.
Precious metals and energy are two sectors that both Goldman and
Credit Suisse are overweight.
It's not hard to see why. Oil just broke through $88 a barrel,
silver recently touched $30 an ounce and gold has traded north of
$1400 an ounce twice over the last two months. Goldman has gone out
on a limb and called for gold to hit $1750 an ounce in 2012, at
which point the firm expects the precious metal will have reached a
Goldman also expects oil futures to hit $105 a barrel in 2011, a
call that I've seen other groups suggesting as well. In my opinion
a stock market that rises around 15% and a GDP outlook of 4.5
percent for a developed country such as the U.S. supports this
The bull market for commodities will continue until government
fiscal policy worldwide stops trying to get inflation to kick in.
Ignore anything you read that suggests the Fed doesn't want
inflation - it does, and I suspect won't move to tighten (raise
interest rates) until it achieves 2-3% core inflation.
There are a lot of reasons to be bullish on stocks right now.
All indicators point toward stabilization in the financial system,
containment of the European debt situation, and global growth that
will favor developing nations over developed nations.
In this environment, we want to be long stocks, and stay away
from bonds. We don't touch bonds, so there is little reason to
dwell on this asset class for long.
However the equity over bond advantage is worth a brief mention. In
a low interest rate environment, like the one we are currently in,
money is cheap and available. This means that higher returns on
capital are more likely for borrowers than lenders.
Firms can borrow money at a low cost, and use that capital to
generate growth. The interest payments are somewhat insignificant
considering the returns on good growth initiatives. Similarly,
companies that have heavy debt loads are able to buy 'old' debt
back with free cash flow, or refinance to a lower rate.
The availability of cash is helping companies grow, and helping
troubled firms stabilize. But despite solidly upward trending EPS,
un-employment is still high and many investors are shy of the
Once companies (that have been ultra-slow to invest their
profits in new employees) start hiring again, retail investors are
more likely to jump into the market. Both are very real positive
catalysts in 2011, and are highlighted in more than one of the big
investment firm's 2011 outlooks:
We believe that US employment should rise by 1% a year and we
believe that US corporate have over-shed labor."
- Credit Suisse
Long term investors (retail, pension funds and insurance
companies) are fundamentally cautiously positioned in equities.
Yet, very recently investors have started to switch out of bond
funds and into equity funds
." - Credit Suisse
Sectors you should add exposure to include energy specifically
oil and gas, technology (I've been overweight for a while, and will
continue to add here), and financials.
My somewhat bullish outlook on financials reflects stabilization
in the financial sector, stronger balance sheets, and the
likelihood that these institutions will return money to investors
by increasing dividends.
Add all this up and it looks to be a good year for small cap
investors. I'd like to know what your outlook is. Send me your
thoughts on investing in 2011 at: