U.S. stocks have been on the march. Last year's market rally drove stocks up to levels not seen for two years – and many prognosticators believe that higher highs are still to come.
The S&P 500 rose more than 1.1% on the New Year's first trading day to close at 1,271.89. It traded as high as 1,276.17, a 52-week high and its high-water mark for the last two years.
"More people have joined the bullish bandwagon for 2011 because individual investors are ready to purchase stocks for the first time in a long time," said Ned Riley, chief investment strategist for Riley Asset Management.
The latest economic reports have further buoyed investor bullishness. U.S. factory goods orders in November unexpectedly rose 0.7%, and U.S. construction spending rose for the third consecutive month in November.
Analysts are now fanning the flames of market optimism. A CNNMoney survey of 32 investment strategists and money managers predicted an 11% climb in the S&P 500 in 2011.
"Everything seems to be in place for the stock market to rise," Steven Goldman, a Weeden & Co. market strategist, told CNNMoney. "We still have decent earnings growth and stimulative policies from the government that will help stocks keep up their performance."
Goldman Sachs Group Inc. (NYSE: GS) analyst David Kostin, who accurately predicted the S&P's 13% advance for all of 2010, expects 2011 to be even better: He sees a 15% advance in the New Year, which would take the S&P to 1,450. Predicted high profit growth and corporate balance sheets awash with more than $1 trillion in cash bolstered Kostin's bullishness.
The CNNMoney survey predicted company profits in the S&P 500 would rise 10% in 2011, with earnings per share averaging just above $92. The sectors collecting the most bullish attention include industrial stocks, which rose 25% in 2010, energy stocks and tech companies.
Of course, not everyone is buying into this rose-colored outlook. Some observers expect a much more modest performance.
Wells Fargo Advisors' Chief Macro Strategist Gary Thayer is predicting a 3% rise in the S&P 500 next year, claiming company balance sheets aren't as healthy as people many think.
"A lot of the company balance sheets up to this point have benefited from significant cost cutting, not sustained revenue growth," said Thayer. "And we don't expect to see strong revenue growth in 2011, either."
Thayer also said if the U.S. Federal Reserve starts to tighten its monetary policy this year, the second half of 2011 could be marked by market volatility and a challenging environment for investors.
Other analysts warn investor fears could cause occasional pullbacks, creating a rocky road to profits.
"While stocks should be boosted by good economic news flow, a variety of troubling factors…could all contribute to fairly uneven progress for the S&P 500 with a number of spikes and dips for investors to navigate," Tobias Levkovich, chief investment strategist at Citigroup Inc. (NYSE: C) wrote in a research note for clients.
This prompted last week's Money Morning "Question of the Week:" How do you think the stock market will perform in 2011? Do you see it rising as much as 15%, or are you expecting a more-modest increase in the 3% range? Or are you bearish – and worried? Do you think the currently pervasive bullish hype is warranted? Or are investors getting overconfident, leaving themselves vulnerable for a nasty market pullback?
The following is a collection of responses showing readers' bearish sentiment, discouraged by U.S. fiscal policies that threaten sustainable economic recovery and could damage market performance.
Hyperinflation Kills the Bull
Unfortunately, I am bearish due to the fact that we are heading for a hyper-inflationary period. The United States, thanks in large part to the infamous Fed, has been printing money based on nothing at an unprecedented rate. As other nations see that our debt will never be paid off, money will be become even less valuable.
Thus, stocks may go up for a while but it's not a result of economic expansion. Sooner or later, the walls will come crumbling down.
But, I am bullish on silver, gold, etc
– Tom C.
Wall of Worry, Anyone?
Can you say "Wall of Worry"? I'm not worried about making money in the market. I'm worried that the money I make may not buy anything. I believe that the Fed-Treasury shell game is about to be exposed.
– Kirk C.
The Crash is Coming
One has to be pessimistic about the future for the U.S. stock market given the load of debt that is on the U.S. credit card. With the insane federal policies that have prevailed for several decades one has little justification for being bullish about the stock market. If the Republicans in the House can hold the line on fiscal responsibility, reduce government spending, and most importantly slash government regulation, the crash may be less catastrophic than it will be if the Obama administration policies prevail for another two years.
Unfortunately, if they do the right thing it may in fact occur sooner. The 2011 – 2012 recession most likely will be unprecedented in world history.
– Ron C.
The dollar will crash in 2011 and this will bring a depression to the United States of much greater magnitude than the one that started in 1929.
– Pedro D.
Bullish? You've got to be nuts. The nation is bankrupt. Our political leaders are a pack of morons. The Federal Reserve is run by a bunch of pathetic incompetents. Meanwhile, two wars are daily draining billions of dollars we don't have and we are borrowing from all over the world, bankrupting everyone else as well.
Yeah, sure I'm bearish; isn't everyone?
– Jose J.
Just a Baby Bull
We are in a baby bull market inside a bear market. The market is overbought. After a pull back the market in 2011 will probably run 10-15% higher than 2010's December highs.
We have gone through a door in history where we have never been before. The news media tries to make you think the market will run up forever, but there will be problems in our banking system, real estate, and unemployment for years to come. Everyone knows the way in which unemployment is figured is a total joke. In time interest rates have to go up and in the near future the interest note on all of the money we keep borrowing – and rolling over the principal – is coming due.
– Ron J.
Bull …Then Bear
I feel 2011 will start out bullish, but mid-year will turn bearish. We always seem to be bearish right after an election. With all the money being printed, the Fed will have to raise interest rates to hold inflation in check. When that happens, the market will change to a bear. I predict the market will increase in the 8-10% range by mid-year, but inflation
will bring it down to a 2-3% real increase. I feel inflation will be that significant – especially food costs.
– Doris K.
Mildly bullish, but with a 10% correction sometime during the year.
The Bottom Line
It is going to be a bear!
– Samuel J.
[Editor's Note: Thanks to all who responded to last week's "Question of the Week" regarding the outlook for U.S. stocks in 2011.
Be sure to answer next week's question: Are you worried about your job? Do you feel safe from the threat of unemployment, or is your position, company or industry vulnerable? Has your employment situation changed at all during the financial crisis? Do you feel you are underemployed?
Send your answers to firstname.lastname@example.org.!
Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at email@example.com. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
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