2011: Stocks, Gold, and Facebook

Predictions are the ultimate tool to make you look a fool, so it seems odd that people are always keen to make them. With the understanding that I will immediately forget the ones I get wrong and loudly trumpet those I get right, here are my four predictions for the markets in 2011:

1. Stocks will outperform bonds
There are a number of factors that look likely to propel stocks higher in 2011. Companies will give the process a push with an acceleration in share buyback programs and M&A. Indeed, corporate managements will be under increasing pressure to put to work the much-vaunted mountain of cash at their disposal. The easiest and most profitable way for management do that -- most profitable for them, not necessarily for shareholders -- is through share buybacks and acquisitions, both of which favor higher stock prices.

Individual investors could also provide a boost to stock prices as they reallocate part of their assets from bonds into equities. We are seeing the first signs of this, and the process could accelerate if we get more confirming positive data regarding the U.S. economy.

Does this mean investors should be overweight in stocks? No, not unless they are careful stock pickers (or own mutual funds run by careful stock pickers). Stocks began the year overpriced, and they are even more so today. Still, some segments of the U.S. are more attractive than others:

2. Large- and mega-cap stocks will outperform small caps
Small-cap stocks smashed large-cap stocks in 2010 (28.2% vs. 16% for the Russell 2000 and Russell 1000 indexes for the year through Monday, respectively). That outperformance stretches far back, with the Russell 2000 ahead of its large-cap counterpart over the prior three-, five-, 10-, and 15-year periods. The same holds true when we compare the Russell 2000 with the mega-cap Russell Top 200 Index. However, at a price-to-earnings multiple of 14.4, I much prefer the Russell Top 200 today (P/E of the Russell 2000: 18.6).

Indeed, high-quality large-cap stocks remain the most attractive segment of the market (although they are less attractive in absolute terms after the recent run-up in stock prices). It's hard to lose money -- assuming you have a true stock investor's time horizon -- when you buy franchises like a Johnson & Johnson (NYSE: JNJ  ) , Cisco Systems (Nasdaq: CSCO  ) at an 8% earnings yield, or Hewlett-Packard (NYSE: HPQ  ) at 12.5%.

3. Gold will break $1,600 ... and $1,150 
I'm expecting significant volatility in the price of gold in 2011, and the upward trend could be less well-defined than it has been in the past few years. Fault lines remain in the fabric of the global economy and financial system, which create a floor for gold prices. Where that floor lies is difficult to say, but it's hard to imagine we will see gold below four figures next year. However, I think it's quite possible the metal will breach both $1,150 and $1,600. Owners of the SPDR Gold Shares (NYSE: GLD  ) should be prepared for a real bronco ride next year.

The catalyst for price declines: improving sentiment regarding the health of the U.S. economy as data confirm an acceleration in the pace of the recovery. As far as price increases go, there is a high potential for one (or several) black swan event(s) that would push investors into gold. The obvious one here is the European sovereign debt crisis -- the gift that keeps on giving for those who trade volatility.

4. Facebook goes public
Within the past couple days, I have read the following predictions for 2011:

I don't see either of those materializing next year. For one thing, as a private company, Facebook doesn't have the currency to acquire a $37 billion company. However, these predictions illustrate that Facebook is considered to be the hot property in tech right now. The company lies at the heart of the social networking phenomenon and has become the world's most visited website -- surely that's worth something. That kind of buzz is begging to be monetized through an IPO; Facebook's employees and its venture capital backers -- two of its key constituencies -- must be intensely impatient to see this happen. Mark Zuckerberg won't resist becoming the 2011 incarnation of 1980 Steve Jobs.

Perhaps you disagree with these predictions or you've got some of your own. Either way, let me know in the comments section below.

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Alex Dumortier, CFA has no beneficial interest in any of the companies mentioned in this article. eBay is a Motley Fool Stock Advisor pick. Johnson & Johnson is a Motley Fool Income Investor selection. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson. Motley Fool Alpha owns shares of Cisco Systems and Johnson & Johnson. 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.


Read/Post Comments (12) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2010, at 3:50 PM, TMFHousel wrote:

    Best intro ever.

  • Report this Comment On December 29, 2010, at 4:34 PM, TMFBreakerRob wrote:

    Nice article, Alex...and an attaboy for that humble intro...LOL. :D

    Stocks outperform bonds? Agree.

    Large/mid outperform small cap? Well, it depends on what you're buying doesn't it? ;) I have full positions in most of my small caps, plan to add a couple, but will be buying more AAPL and AMZN plus other large caps too. It all comes down to the specific companies unless you're an index buyer.

    Big moves up AND down for gold? Hmmm....I agree with up, don't see down as likely this coming year....but I have no investment here either.

    Facebook public? Could be....no insight there.

    I'd add one thing: Higher commodity prices for 2011 (except NG). That's *my* call. My only positions are in the oil biz, but they have paid off massively over the last couple years. Again, it's all about the individual companies....

  • Report this Comment On December 29, 2010, at 4:52 PM, langco1 wrote:

    gold will break below $300 and facebook missed its window by almost two years it does not matter anymore what it does....

  • Report this Comment On December 29, 2010, at 5:21 PM, Merton123 wrote:

    I believe that Alex did a good job forecasting next year. I believe that European Stocks may have a comeback as their governments fix their budgets? Eventually the Feds are going to have to put on the breaks to the economy (i.e., rising costs for goods and services) and our national stock market will start to cool maybe third or fourth quarter next year? I believe that the place to be is in global mutual funds - either index and/or stock picker like Motley Fool. I am waiting until after the Jan effect has run its course before investing the next $5,000 Roth Money with an inclination towards Motley Food "Independence Fund". And no they haven't put me up to plugging their product :).

  • Report this Comment On December 29, 2010, at 5:23 PM, easynow7 wrote:

    Your prediction on gold pretty much says you have no idea what is going to happen. I'm pretty sure gold will be between 1150 and 1600 next year but with 70% difference its a fair bet.

  • Report this Comment On December 29, 2010, at 6:00 PM, TMFAleph1 wrote:

    @easynow7,

    You completely misunderstood my prediction regarding gold. I did not write that the price will remain between $1,150 and $1,600; on the contrary, I'm predicting that gold will fall through $1,150 on the downside AND break $1,600 on the upside.

    Alex Dumortier

  • Report this Comment On December 29, 2010, at 7:38 PM, Clint35 wrote:

    Who cares about gold? It sucks as an investment, Warren Buffet said so.

  • Report this Comment On December 30, 2010, at 10:28 AM, griderX wrote:

    The stocks outperforming bonds sounds like a safe bet....I'm very curious to see how the Muni Market plays out next year. As far as Europe....it's a mess, I think all these "Band-Aid" fixes will eventually start to Bleed ;)

    On Facebook...if it does go public at around current estimated valuations $40-50 Billion would you invest in it at those valuations?

    Gold...who cares? It's copper that is intresting....

  • Report this Comment On December 30, 2010, at 11:09 AM, AustinATL wrote:

    Great article Alex!

    I am right in line with most of your predictions for 2011 and made some moves this week to strengthen my positions accordingly.

    2 questions for you (and anybody else who wants to chime in):

    1) If the gold asset bubble (my perception, as there are 3 "cash in your gold" commercials in every commercial break on tv) continues to build, I feel very strongly that a short position, such as a leveraged ETF that plays the inverse of the gold index, will perform very well over the next few quarters. Any thoughts there?

    2) I agree that bonds should struggle in 2011 as investors move their money to the once-again hot stock sectors. I started a position in TBT today to try to capitalize on this. Any recommendations on other ways to cash in (other than just sticking with my good Motley Fool Rule Breaker and Stock Advisor companies?)?

    Thanks!

    Austin

  • Report this Comment On December 30, 2010, at 11:27 AM, ContraryDude wrote:

    I am already seeing evidence that #2 is happening. My two CAPS players are converging - one player holds mostly smallcap growth stocks and the other, mid to large cap dividend-paying stocks. The latter player has been catching up to the former and may soon overtake him.

  • Report this Comment On December 30, 2010, at 1:07 PM, Merton123 wrote:

    Austin - you have a good idea about shorting gold. The challenge is all in the timing because when ever you use leverage it can work for you or against you based on the timing of the gold bubble burst. The stock market is full of opportunities - the key is being able to focus on one area of the market and do it well (i.e., convertibles, values plays, growth plays, what ever). Shorting is a sophisticated strategy that probably is not appropriate to investors who spend less then 5 hours a week following the market. Or at least that is my two cents :)

  • Report this Comment On December 30, 2010, at 3:38 PM, TMFAleph1 wrote:

    @AustinATL

    I agree with you that gold is a bubble (see the following article for my justification:

    http://www.fool.com/investing/etf/2010/11/02/warning-gold-co... ).

    However, I'd strongly advise against using a leveraged ETF to bet against gold. Once we are in bubble territory, the price of gold is purely a function of market psychology. At that stage, there is little stopping the bubble from inflating further -- I can certainly conceive of $2,000 gold. That could become very uncomfortable for someone shorting gold.

    For someone who is dead set on betting against gold, I would recommend doing so only with a small amount of "casino money" -- one must be comfortable experiencing a total loss. In that case, my suggestion would be to buy long-dated put options on GLD.

    Let me be clear: This is NOT financial advice. Leveraged ETFs and options are sophisticated products. If you do engage in such a speculation, make sure you understand how they function and their risks.

    Best,

    Alex Dumortier

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