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
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
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:
- Facebook is acquired by Apple
Facebook acquires eBay
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.
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