Called it in ’10 – Let’s Do it Again!

The economy is still improving, the earnings are still rising – better than expected – and stocks remain cheap . . . so there you have it . . . Happy New Year! 

 My prognostications last year were proven to be correct.  2010 turned our much better than the majority of analysts expected for the market and the economy.  But that was last year and this year we have to rewind the clock.  I will prepare a piece that expresses my views on the market for 2011 in the coming days.  There are several critical economic reports due in the next two weeks that I want to review before I put all my thoughts in writing. 

 Here are some comments I made this time last year . . . they are mostly still true today.

  . . . I believe that we are still in front of the peak in the market . . .  I believe the case can be made we remain in the very early days of the economic recovery and should have prolonged period of equity value growth well into the second half of 2010.

 I say that for several reasons.

     a)      we have not seen the peak in earnings growth.    

     b)      we have not seen a flattening in the yield curve.

     c)      we have not seen the retail investors throw caution to the wind and pile into equities.

 I suspect there will be some selling pressure in the coming days as gains from 2009 were pushed into a new tax year.  The selling will heralded with relief from the market technicians.  Earnings and improving macro data including potentially improved labor metrics as soon as this Friday should provide the foundation for the next leg up.

 2010 will be a remarkable year.  Don’t allow your fears to overcome your logic.  Rational exposure to innovative growth companies such those followed by Aberdeen has a role in everyone’s portfolio.

 We will know when we are at a top when retail equity mutual funds have had sustained multi-month/quarter inflows – they have experienced persistent outflows even up to just a couple of weeks ago.  December may see the first measurable equity fund inflow since the financial crisis hit in 2008.  I expect Q1 2011 will see demonstrable equity fund inflows and accordingly a sharp rise in equity prices.  We will also likely see aggressive corporate buy backs of stock as we proceed through the Q4 2010 earnings season.

 Bottom Line:       Following a slight near term correction, the stock market should continue to go higher.  2011 is shaping up to be another positive year for the economy and the equity market.  The factors that will drive up earnings will also drive up interest rates.  This causes me to continue expect a severe bond bear market in 2011.