The market made impressive strides in the last two years. It is up almost 90% from the March 2009 lows and has essentially retraced its steps to where it stood before the Lehman Brothers collapse.
Should we expect more of the same? Or brace ourselves for a lackluster run at best? Or, as some doomsayers never tire of reminding us, should we get ready for that day-of-reckoning stemming from the fiscal imbalances in the U.S. and debt problems across the pond?
I don’t buy into those latter scenarios. In fact, I firmly believe that we entered 2011 in much better shape than in the last several years. Don’t let the endless harangues from doomsayers about U.S. debt and deficits scare you away from the stock market.
I am not brushing the problems/risks under the carpet; fiscal imbalances in the U.S. and Europe’s sovereign debt problems are real and remain a concern. But suffice it to say that my overall outlook is for a better stock market performance this year than in 2010.
I am not someone who always sees the glass half-full. My sunny outlook for 2011 has a sound fundamental basis, which I want to share with you here. And if you stay with me a little longer, I will tell you about the sectors and companies that will give you a market-beating portfolio for the year.
Here are the top three reasons for my positive outlook:
1) Improving Macroeconomic Backdrop: The economic landscape has been steadily improving over the last few months. As a result, the fear of a double-dip recession and/or deflation, which were major stock-market obsessions in 2010, has significantly receded. A combination of proactive monetary and fiscal measures helped this process along. This has resulted in rising estimates for GDP growth rates in 2011 and beyond.
2) Solid Earnings Profile: All through the roller-coaster ride of 2010, the earnings recovery in the corporate sector didn’t lose a beat. In fact, by the halfway point of 2011, corporate earnings will have crossed the prior cyclical peak reached in 2007. With corporate profitability and financial profiles in their best shape in years, we have the makings of a virtuous investment-led growth cycle.
3) Falling Equity Risk Premiums: The overall risk associated with investing in the stock market has been at its highest level in the last two years. A key driver of this trend was the turmoil of the downturn and weak 10-year returns for stocks. As a result, money was coming out of the stock market and going into bonds and other asset classes. We are seeing early evidence of this trend reversing in recent money flow reports.
Winning Stocks Are in the Right Industries
While I am looking for strong stock-market gains this year, I expect those gains to come largely from companies in a handful of industries. As the economic picture becomes more stable, stocks will no longer be moving with a high level of correlation as we’ve seen in the past several years. In other words, you can’t be in just any stocks to make money; you have to pick the right ones.
Moving into 2011, I am not looking for defensive industries to ensure downside protection. I am staying away from sectors like consumer staples (food, beverages, etc), healthcare and utilities. I believe that the quality of the pick provides for plenty of downside protection.
At this stage of the economic cycle, companies in the technology, industrials, consumer discretionary, finance and energy sectors are well placed.
The global economic recovery is driving capital investments, which directly benefits the technology and industrial sectors. In technology, stay away from ‘fads’ and yesterday’s winners. Concentrate instead on players enjoying product upgrade cycles and improving end-market fundamentals. The same goes for industrial names, though look for both product and market diversification in the industrials.
Finance will produce a ton of winners in 2011, but navigating that minefield is not only difficult, but downright scary. With more regulatory clarity, many of the large banks will restore dividends this year. But they still face a lot of challenges and uncertainties. Don’t give up that easily though. Finance is more than just banks; it has brokers, asset managers, insurers, payday lenders and REITS. Asset managers remain well positioned and it would pay to look among the REITs as well.
The consumer discretionary group was battered in the downturn, but it’s fortunes are set to improve as the economic outlook continues to stabilize. Of particular significance for this group is the improving outlook for the U.S. labor market. Job gains are expected to accelerate from last year’s anemic pace, though the unemployment rate will remain elevated for a long time. Look for industry players that enjoy a competitive advantage in producing a compelling product.
A team of Zacks analysts and I have compiled a portfolio of 10 stocks that fits this investment framework for the coming year. It’s an annual service that details stocks to buy and hold for the next 12 months. It’s Zacks Top 10 Stocks for 2011. These are hand-selected stocks that are uniquely positioned to do well in this new year. We are releasing them literally within days, so if you sign up now, you can be first in line to receive them and learn our top picks for 2011. But don’t wait; click the link below.
Learn more about Zacks Top 10 Stocks for 2011.
Sheraz Mian
Sheraz Mian is the Director of Research at Zacks Investment Research where he relies on access to valuable data to assess winning stocks and funds. Now, you can see the stocks that he and his team of analysts believe to be the most promising for the coming year in Zacks Top 10 Stocks for 2011.
