The Market Will Be Up Another 10% in 2011...Or Not!

 



It’s that time of year again when we wade through all of the data in the hopes of finding some way of predicting how the markets will do this year. Amazing, we investors are always looking for the so-called investment experts who can forecast the future. If we look back at 2010, who could have foreseen the flash-crash, the European Sovereign Debt Crisis, the election results, Quantitative Easing (QE2) by the Fed, the extension of the Bush tax cuts, the BP oil spill, etc. The point is that each of these events impacted the market, yet in January, 2010, were impossible to predict.


No one has the power to see the future or predict where the markets will go in the short term, the next 12 months. It would be easier to predict who will win the World Series next year.

What I will attempt to do is give you a list of reasons to be either “optimistic” or “pessimistic” about our economy and the markets.


Let’s first look at the reasons for optimism:

·         The Bush tax cuts have been extended giving us a stable tax environment for the next 2 years.

·         Unemployment claims seem to be declining.

·         Real consumer spending is on the increase.

·         Core inflation is extremely low.

·         Earnings growth remains high and steady.

·         Short term interest rates are low and steady.

·         QE2 is boosting asset prices (the stock market).

·         Consumers are getting a 2% Social Security payroll tax cut in 2011.

·         The election cycle favors the pre-election year (2011) with nodown years since 1945 and average annual gains of 17%.


Now some of the reasons for pessimism:

·         Underfunded pensions and the looming threat of municipal defaults at the local, county, city and state levels.

·         Commercial real estate debt issues.

·         Housing remains weak and the fact is that it can’t improve significantly until the employment picture improves.

·         Minimal economic growth which for the most part is synthetically stimulated by government incentives.

·         U.S. government debt stands at $13.7 trillion, just below our GDP of $14.7 trillion. It (the debt) will continue to increase for at least the next 4 to 6 years.

·         Sovereign debt problems in Europe will get worse before they get better.

·         Unemployment stands at 9.4%, but is probably closer to 16 or 17% due to those underemployed or not looking for work. It will be many years before we can get it back down to even 7%.

·         Social Security and Medicare have serious financial problems which have yet to be addressed.


The Great Disconnect


In summary, we have markets that have rallied more than 10% in the last three months and an economy that is still on life support in a recovery from the “Great Recession”.


This certainly validates the premise that the economy and the markets do not always move in the same direction. So, is the market only going up due to government and Federal stimulus or is there more to it? The Fed can drive the market higher but eventually it will pop. The question is when?


Here is the great conundrum: The market has some favorable technical winds at its back due to an out of control Fed creating extraordinary liquidity which could support an early year rally. However, eventually the post-crash recovery rally will come to an end. The ice is very thin.


So we are not drinking the Kool-Aid that the Fed has been disbursing. We believe that the market is too fragile for a long sustained bull market rally.


Riddle: What 9-letter word begins and ends with the letter S and has only one vowel?
(Answer at bottom)


What to do???


We have outlined the case (s) for the market going up, or down. Take your pick! That is why it is so hard to predict how the year 2011 will go.


Thus, as a firm, we have taken the position that we will not attempt to guess where the markets are heading. We are in fact market agnostic. We believe it is our role to help you achieve your goals and protect your assets. For our retired (and close to retired) clients, it is important to have a comfort level that you will not outlive your assets.


Finally, we need to take a rationally optimistic view of the future, walking the fine line between succumbing to dire pessimism on one hand and blind optimism on the other. This will not necessarily pay off over the next 6 to 12 months, but history tells us that we will be well rewarded for investing in those programs which position us appropriately for a bumpy and uncertain future.


Together we feel confident we will help you to achieve your goals. Should you have any questions on anything in this email, please give us a call.


Let’s look forward to a healthy and prosperous 2011!


Best regards,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Edward J. Kohlhepp, Jr., CFP®, MBA

P.S. Health update: Ed Sr. is recovering well from surgery for bilateral knee replacements on November 15, 2010. He expects to be back at the office full time by February and is in the office part time currently. Although there is still 6 to 8 weeks of physical therapy ahead, he expects to be back to golf and karate hopefully by March or April.

Quote: Be always at war with your vices, at peace with your neighbors, and let each new year find you a better man. ~ Benjamin Franklin


Answer to Riddle: Strengths


 

 

Sources:

www.horsesmouth.com
www.advisorperspectives.com
Gluskin-Sheff
Dan Richards – www.strategicimperatives.com
PringTurner Capital Group
Charles Schwab
CMG.com

 

This material and does not necessarily represent the views of Cambridge Investment Research, Inc. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
Fax: 215-340-5788
Email: Info@KohlheppAdvisors.com

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