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Published: September 23, 2010
Even as you continually assess current events for any impact
on your portfolio, you also need to spend time thinking about
what events may be on the horizon. And although none of us has a
crystal ball, it's important to try to anticipate the direction
of
economics, sector activity, politics and virtually any other
issues that may affect the investment environment.
The list below contains possible scenarios for the next 12
months that could impact your portfolio in a meaningful way.
Some, such as the expectation that individual investors will
rotate assets back into the stock market are said with a fairly
high degree of conviction, while others such as a subsiding of
violence in Mexico, are simply expressed as potential scenarios.
1. New jobless claims fall below 400,000 later in the fourth
quarter, and meaningful job creation begins in earnest in 2011
as companies realize that they've squeezed out all possible
productivity enhancements and need to re-build depleted
workforces. The
unemployment rate is slow to fall, as previously
discouraged workers start to look for work again. But investors
focus on the monthly jobs creation number instead of the actual
unemployment rate.
2. Noting the impressive synergies that Delta (NYSE: DAL)
derived from its
merger with Northwest (which were only belatedly appreciated
by investors), investors start to bid up shares of UAL (NYSE:
UAL), which will have the surviving ticker in the
newly-renamed United Continental Holdings. Investors take note
of the fairly low
P/E ratios in the sector, even as it has rebounded sharply
in the last 12 months. P/E ratios move +50% higher during the
next year, as investor concerns about any new economic weakness
start to abate. Airlines are able to raise prices only modestly,
but passenger volumes per plane, along with capacity increases,
continue to grow, setting the stage for a further rebound in
profit gains for the sector into 2011 and 2012.
3. Venture capitalists start to get anxious. With pensions and
endowments looking to pull some money out of
venture capital funds, venture capital firms seek ways to
monetize their holdings. As the
IPO market remains in a funk, they seek out large public
tech companies to buy out at large discounts to recent financing
rounds. This extends the tech M&A frenzy, and these deals help
set the stage for further gains in tech stocks in 2011.
4. Britain's financial austerity plans are watered down a bit by
Parliament, but still lead to an unexpected shock in the U.K.'s
economy in 2011 as unemployment rises, labor strikes ensue and
the pound starts to lose its safe-haven status. Major British
corporate and real estate assets go up for sale, and
newly-injected foreign capital sets the stage for a nice
rebound, but not for several years. The weaker British Pound
also triggers a surge in tourism, one of the country's few
bright spots in 2011.
5. States finally stop bleeding, as heavy cost cuts take effect
and revenue finally starts to rise at a modest pace. Several
states with high debt-levels reach a crisis point in 2011 as
federal stimulus support winds down, but most states start to
move back toward a balanced budget. Smaller state governments
create a local drag on employment in places like Albany, NY,
Madison, WI and Sacramento, CA.
6. Individual investors finally start to re-enter U.S. equities
in a major way in 2011 as the need to build savings in the face
of looming retirements becomes a major consumer concern, and
rising savings levels that are getting paltry yields in
CDs or
bond funds get put back into the market. The market rallies
in the first half of 2011, as the third year of a presidential
cycle is usually quite good for stocks and economists start to
look ahead to moderate growth in 2012 and 2013.
7. Health care reforms begin to take effect, with unexpected
positive and negative results. Major programs are modified, but
not repealed, even as the GOP uses the issue as a political
wedge. The signs of a political center emerge after a sharp veer
to the right by the GOP in this fall's elections spook moderate
Republicans. Bipartisan legislation starts to gain traction
again as the GOP realizes that a centrist approach is the only
chance the party has to take back the White House in 2012.
8. Oil prices start to move toward the $100 mark as global
demand starts to meet supply. Airline stocks are still able to
rally in this environment (unless oil exceeds $100 per barrel).
Natural gas prices rise moderately, but still remain well below
the peaks of 2007 and 2008. An increasing number of auto and
truck makers announce plans to sell natural gas-powered cars.
9. Latin America finally sheds its reputation as a region of
only upper and lower classes, and finally gets credit for a
fast-growing middle class. This in turn leads to a continued
influx of global investment, setting the stage for further
market gains in Brazil, Colombia and Chile in 2011. The Mexican
crime surge finally starts to abate with increased help from
foreign governments. A pick-up in the U.S. economy gives a
corollary boost to Mexican importers. But the Mexican government
faces a renewed crisis when declining oil revenue forces it to
sharply curtail staff at Pemex, the nation's bloated national
oil company. The projected long-term drop in oil output at aging
fields leads to a sharp drop in the stock market in 2011 as
government economists predict a fiscal crisis for subsequent
years.
10. In the final quarter of 2011, the housing market finally
springs to life as emboldened home buyers jump in after seeing
housing prices start to rise. Housing prices will take a number
of years to return to pre-recession levels, and
housing starts will also remain below their peak, but still
start to trend higher in 2012, 2013 and 2014.
Action to Take --> On
balance, these factors are largely positive and should set the
stage for moderate gains for equity investors. But after the
strong rebound from the spring of 2009 to the spring of 2010,
investors will need to temper their expectations. Average gains
in the +6% to +8% range should be welcomed, especially in the
face of tepid fixed income yields. But any market rally that
moves the market's gains well above that rate should be a reason
to take profits. As noted above, tech stocks, airline stocks and
housing stocks would all benefit from an improving economy. To
the extent the dollar starts to weaken, export-focused
multinationals will also become a major theme.
-- David Sterman
Staff Writer
StreetAuthority
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