Year in Review, Year in Preview
December 2010 ended on a strong note with the S&P 500 gaining more than 6% for the month. The December rally pushed the S&P 500 to its first back-to-back double-digit annual gains in more than 10 years. We can hope that the momentum continues and 2011 brings another positive year.
The climate looking forward is one of optimism with an overwhelming majority of market analysts predicting another positive year for the markets in 2011. Many predict that we will see a third straight year of double-digit returns. If the near 3% rally we have seen year-to-date in the S&P 500 is any indication, the optimism may be accurate.
The U.S. economy is the key driver behind the market optimism. Corporate profits are at all-time highs, unemployment seems to be in check, the government is providing stimulus in the form of cash and tax breaks and companies are starting to spend again. All of these factors have increased investor confidence.
So how do we rally for a third year when the S&P has posted two straight years of double-digit returns? Part of the answer lies in the solidification of the fundamentals mentioned earlier, but some also rest in the fact that many retail investors have missed the rally over the last few years due to an unwillingness to increase risk in their portfolios by adding stocks to their allocation. Now they see the markets rallying and the economy starting to stabilize and they want in. There is an enormous amount of cash still on the sidelines waiting to participate in the current rally. An indication that the shift has already started to happen is that fund companies are reporting investors moving money from bond funds and reallocating into stock and commodity funds. The increase in risk appetite will keep any short-term selloff in the market short-lived and should provide the basis for another potential positive year for the markets.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
