December 23, 2010
Five Reasons 2011 Looks Promising
Wow! What a wild ride 2010 has been for investors. After an extremely difficult summer with losses in double digits, the market, as if a switch was flipped on September 1st, has roared back, appreciating 20% in the ensuing three plus months ending December 22. Clients of Shapiro Asset enjoyed a return of approximately 25% over the same period. Skepticism of the rally remains as many believe the economy is far from out of the woods. But there is no denying economic data and anecdotal evidence has improved. Gene Epstein of Barron’s gave the following five reasons to believe the economy will maintain the momentum and gain strength in 2011:
- Shopping is back. November retails sales were up 7.7% over last year and the near term trend looks even stronger. The cut in payroll tax passed last week by Congress will also provide a boost. But more importantly wage and salary income grew 3.4% in October, the highest increase in two and a half years.
- Employment is starting to come back. The trend in unemployment claims is encouraging. Even more interesting, people quitting jobs are at the highest level in three years, indicating a firming of the job market and renewed confidence.
- Slack labor markets should mean tame price inflation. Slack labor markets mean wage hikes won’t run much faster than productivity gains, curbing the rise in unit labor costs. The benefit should be that short term interest rates remain low.
- The optimism index of the National Federation of Independent business continues to climb. This is probably a result of the pick up in consumption. Instead of applying a drag to the economy, as it did in 2010, the huge small business sector will apply a boost.
- The tax deal finally approved last week obliterated a head wind. Although the outlook for the federal deficit has worsened, the deal does delay a fiscal shock that would have slowed the expansion. The deficit issue is having a positive effect on the equity markets, as bond investors and been withdrawing from the sector. PIMCO, the worlds largest bond fund, experienced its’ first month of net withdrawal in over two years. Given the renewed appetite for risk (greater confidence in the recovery), equities are reaping the benefit.
The last newsletter in September stressed a steady, disciplined investment strategy, focusing on your investment horizon and asset mix goals. Those who did participated in the fully unexpected strong rally in the final four months of this year.
I continue to be in the camp that believes the economic and fundamental backdrop continues to strengthen, which will benefit stock market performance into 2011. Shapiro Asset continues to apply its value focus on companies generating free cash flow with a strong balance sheet, thus positioning the portfolio to participate in the markets’ upside potential while providing some downside protection. Security selection has been geared to the expectation of continued strengthening of the consumer and industrial sectors.