The Optimist's Guide to 2011

Things tend to get better over time. That's just the way it works. Life expectancy, real income, technology, medicine, transportation, communication ... these things tend to rise relentlessly higher for the majority of the world over time, pushing aside wars, famines, recessions, and natural disasters that get in their way.

"The pessimists who dominate public discourse insist that we will soon reach a turning point and things will start to get worse," writes Matt Ridley in his book The Rational Optimist. "But they have been saying this for two hundred years."

Ridley's book ends with a challenge: "Dare to be an optimist."

So let's do that. Here are five things to be optimistic about as we head into 2011. (For a different view, click here for five things to be pessimistic about.)

1. Jobs
Unemployment is nearly 10%, and that number almost doubles when you count those who have stopped even trying to find a job. It's bad.

How can you be optimistic about jobs in that situation? Because it's that bad. Unemployment is high because companies are running lean operations -- so lean that they've squeezed every last bit of juice out of existing workers. Labor productivity has slowed dramatically, even contracting earlier this year, after a massive surge in 2009, showing that companies are reaching the end of their cost-cutting abilities. They'll need to add more workers if they hope to expand. It'll be slow, but the trends are moving in the right direction.

2. Housing construction
The number of homes built every year should roughly meet the level of household formation.

During the housing bubble last decade, construction outstripped household formation by quite a bit. In 2005, more than 2 million homes were constructed while just over 1 million households were formed. There was massive excess. That's why prices are now falling.

The tables have turned. Housing starts are currently running at an annual rate of 555,000 units, yet household formation "will average about 1.48 million annually in 2010-20," says the Joint Center for Housing Studies at Harvard University.

"Even if immigration falls to half the Census Bureau's currently projected rate, household growth will still average about 1.25 million annually," the group says, which "should support average annual housing completions and manufactured home placements of well over 1.7 million units."

Yes, there's still a lot of excess capacity that needs to be absorbed. But once it is, the numbers are pretty clear: Housing construction will need to roughly triple from current levels just to keep up with population growth.

3. Profits
Corporate profits are at an all-time high. The pessimists say this is because companies have drastically cut costs. While that's absolutely true, it's not the entire story. Corporate revenue is also at an all-time high, showing the profit rebound has indeed been helped by actual demand.

Most large corporations, like Procter & Gamble (NYSE: PG  ) and ExxonMobil (NYSE: XOM  ) , also do a lot of business overseas in regions where economic growth is strong, allowing profits to charge ahead even while the U.S. economy stalls.

Here's why this is important: If you run with the pessimists and assume the profits rebound is just a function of cost-cutting, it looks unsustainable. But if you dig deeper and see that it's built on a stronger foundation, the rebound looks far more sustainable. Average estimates call for the S&P 500 to earn $92 next year, and $96 in 2012. At today's prices, that's a forward P/E ratio of about 13.5.

4. Confidence
What's optimistic about confidence is how low it currently is. By any historical measure, consumer confidence is abysmal, far lower toady than it ever was during the darkest moments of the post-9/11 recession.

But that only means there's room to improve. Future economic growth and stock market performance tend to move in the opposite direction of current confidence. When confidence is high, the future will likely disappoint. When it's low, the future will probably be better than you assume. Today's low consumer confidence is one of the most bullish signs about our future.

As confidence rebounds to average levels, consumer spending will rise, corporate cash hoards will be put to work, and investors hiding in the bomb shelters of cash and bonds will venture back into stocks.

5. History
History is what makes me most optimistic about the future. All capitalistic economies follow a predictable pattern: Booms follow busts; busts follow booms. Good times lead people to overreach and overindulge; bad times lead people to underestimate what we're capable of and flush out excess. These things are cyclical.

Panics of the early 20th century gave way to the Roaring '20s, which gave way to the Great Depression, which led to the prosperity of the '50s and '60s, which brought us to the hellish '70s, which gave birth to the spectacular '80s and '90s, which finally led us to the misery of the past decade. What's next? I don't know. But if history is any guide, the coming years will be far better than the previous few.

Fool contributor Morgan Housel owns shares of Procter & Gamble and Exxon. Procter & Gamble is a Motley Fool Income Investor pick. The Fool owns shares of and has written covered calls on Procter & Gamble. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 29, 2010, at 12:37 AM, Zaakman wrote:

    I love the final paragraph, and the fact that there is an article for pessimists and optimists today. Thanks.

  • Report this Comment On December 29, 2010, at 1:23 AM, joandrose wrote:

    There are so many prophets of gloom and doom that it is quite delightful to read an article which highlights the positives. Well done TMF - excellent change to look at the world through optimistic eyes !

  • Report this Comment On December 29, 2010, at 1:29 PM, jrod87 wrote:

    worst preforming stock (in regaurds to price) make best buying oppurtunity. dont over think it. look at the risk to reward ratio and youll find were around the corner from anouther bull market -jrod

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