forecast,stock market,economy,2011

8/7/2019 Forecast,Stock Market,Economy,2011

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Forecast of the Stock Market and the Global Economy

Outlook for 2011 and Beyond

A Market Brief

by

Steven Kim

MintKit Investing

www.mintkit.com

Disclaimer This brief is provided as a resource for information and education. The contentsreflect personal views and should not be construed as recommendations to any investor inparticular. Each investor has to conduct due diligence and design an agenda tailored to individual

circumstances.

2011 MintKit.com


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Short Summary

The stock market and the real economy are interlinked in the present as well as

the future, thus presenting a bundled system for forecasting. The global economy

is slated to expand by some 4.5% in 2011, while the figure for the U.S. is about

2% in real terms. Moreover, the stock markets of the advanced economies are

set to swell by around 15% during the year. By contrast, the pacesetters in the

budding regions are on track to surge by 40% or more.

* * *

Keywords:

Forecasting, Prediction, Stock Market, Financial Markets, Currency, Forex, Real

Estate, Economy, Thailand, USA, China, Germany, India, Investing, Investment

Strategy, Investment Planning

* * *


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Extended Summary

In contrast to common perception, the stock market and the real economy are

intertwined in the present as well as the future a linkage which can serve as the

basis for forecasting. The process is illustrated by way of a timely survey: a

forecast of the stock market along with the global economy for 2011 and beyond.

On the whole, the volume of economic output is likely to expand by roughly 4.5%

over the year to come. The same is true of the growth rate for much of this

decade.

In line with the norm, though, the expansion will be patchy rather than uniform.

For instance, mature economies such as the U.S. will grow by a mere couple of

percent per year after adjusting for inflation.

Furthermore, about 1% of the increase will stem from the buildup of the

population due to the net flow of immigration over emigration. In that case, therate of productivity will creep upward by just 1% per year. The same outcome lies

in store for the average level of income.

On the other hand, the spearheads in the emerging regions will gallop ahead at a

blistering pace. In places such as China and India, the upsurge of economic

output is set to reach 9% or more per annum.

Meanwhile, the exporters to the budding countries will fare somewhere in

between the two extremes of growth. An example is found in Australia or Canada

as exporters of raw materials. Another sample is Germany or Korea as suppliers

of capital equipment or finished goods.


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The second task at hand is to build on the linkage while reviewing the conditions

in the current environment. Although the review deals mainly with the outlook for

2011, the survey also touches on the prospects for the years to follow.

Bilateral Ties between the Present and Future

The long process of adjustment in the real economy has practical implications for

the investor. If an upthrow rumbles through the meshworks of production and

distribution for half a year or more, then the outcome downstream can be

predicted in part by tracking the events taking place right now.

As an example, a sudden drop in the unemployment rate signals a surge in

demand for labor. The clamor for workers is a healthy sign of expansion amongst

the producers in the tangible economy. Moreover, the payout of wages will lead

to a rise in spending power within the ranks of consumers.

As a result, the upswell in production as well as consumption is a booster for the

entire economy. The groundswell of commerce lifts up all manner of companies

including the ones listed on the stock market.

For this reason, the bourse is set to bound higher as investors absorb the news

about a cutback in the jobless rate. In other words, the status of the economy in

the present has a direct impact on the animal spirits of the equity market right

now.

In the converse direction, a bombshell in the financial forum can influence the

real economy as well. For instance, a crash of the stock market will pummel the

equities held by the investing public. Moreover, the crackup on the bourse will

hamper the ability of operating companies to raise capital through the issuance of

common stock.


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As a result, the flogging of consumers as well as producers trips up the entire

economy. In this way, the health of the financial forum has a weighty impact on

the status of the real economy.

To sum up, the stock market often acts as a precursor for the real economy. In

this sense, the bourse acts as a window on the future.

On the other hand, the current conditions in the economy play a vital role in the

networks of production and consumption for months to come. For this reason, the

health of the economy today is a prime factor in the vigor of the stock market.

Put another way, the stock market is not merely a passive augur of economic

conditions down the line. Rather, the bourse and the economy are bound

together in the present as well as the future.

Given this backdrop, a good place to start in forecasting the marketplace is to

examine the latest trends in the economy as harbingers of the conditions

downrange. The outlook for aggregate output can then be used to presage the

course of the stock market as well.

Motley Features of Globalization

To an increasing degree, the fortunes of sovereign nations are tied to the fate of

the global economy. On the upside, the tidal wave of world trade powers a

groundswell of prosperity for all humanity.

Admittedly, the process of globalization produces a number of woeful side effects

as well. In this respect, at least, the transformation is no different from any other

type of change.


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One of the thorny issues involves the revamp of the patterns of production and

consumption. For instance, the vendors that can stamp out goods of higher

quality or lower cost tend to prevail at the expense of their competitors.

On the other hand, the dislocations are not specific to the process of

globalization. From a larger stance, creative destruction is simply part and parcel

of the renewal that marks a dynamic economy.

If the wealth of the world is to increase, then the chains of production and

consumption have to change over time. Although the dreamers may wish things

to be otherwise, progress and stasis happen to be mutually incompatible. You

cant move forward by standing still.

In that case, the best that can be done is to lend a hand to the hapless souls who

suffer the most as a result of the makeover. A sensible program of intervention is

a vital issue that has brought forth a medley of sensible proposals as well as a lot

of half-witted schemes.

On the other hand, a meaningful discussion of the best ways to deal with the

stumbling block lies far beyond the scope of this survey. For our purposes here, it

suffices to note that the bulk of the human population favors growth over stasis,

advancement over stagnation, renewal over ossification.

In addition, the process of globalization will continue to soldier on regardless of

any reasonable program of intervention by the policymakers or reactionaries.

Granted, there will be an endless barrage of sideswipes and upsets from time to

time.

The takedowns will result from a combination of willful acts, natural events, and

societal forces. Despite the reversals, though, the march of progress will surely

prevail over the long run.


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Pace of Growth

Along with the rising tide of globalization, the world economy has been

expanding with only temporary comedowns from time to time. An example of the

latter was the global recession in the aftershock of the financial crisis of 2008.

On the bright side, even the countries at center stage during the financial flap

recovered their footing with remarkable speed. A showcase lay in the United

States, which showed palpable signs of recovery by the summer of 2009. Since

then, the stalwart has continued to regain its strength and to recover a good

chunk of lost ground.

The situation has been similar in other major countries. The players of this stripe

span the gamut from Britain and Germany to Korea and Australia.

On the other hand, many other countries have had a rough time trying to shake

off their torpor and pushing ahead at a respectable pace. The nations facing an

uphill battle include mature economies such as the U.S. and Ireland as well as

budding ones like Lithuania and Poland.

On the upside, however, the most dynamic countries were scarcely touched by

the global blowup. After hitting a speed bump, the go-getters in the sprouting

regions quickly resumed the heady pace of growth they had enjoyed prior to the

trip-up.

A case in point lay in India. During the run-up to the financial flap, the gross

domestic product (GDP) on the subcontinent surged by 9.9 percent in 2007.


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The following year, the growth rate slipped to a mere 6.4 percent. As the global

recession raged in 2009, the GDP slumped a bit further to 5.7 percent

(International, 2010). By the following year, though, India was well on its way to

reclaiming its former pep.

The situation was analogous in other parts of the world. In fact, all the major

countries of the world began to clamber out of the global recession by the second

half of 2009.

Looking Forward

The outlook for world growth over the next few years is more sunny than usual

during the previous decade. A case in point is a forecast by the Organisation for

Economic Co-operation and Development (OECD), a club of several dozen rich

countries round the planet.

According to the chart below, the global economy will grow at rates in excess of 4

or 5 percent a year over the next couple of years (Gurra, 2010). Not surprisingly,

the forecast ascribes the bulk of the growth to the emerging countries which do

not belong to the OECD.

For each bar, the segment in light purple shows the contribution to the growth of

global GDP by the countries in the OECD group. Meanwhile, the dark stripe

denotes the portion due to the budding countries in the rest of the world.


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Millstone on the Economy

In a host of countries across the globe, the housing sector has been a crushing

burden in recent years. During the buildup to the financial blowup of 2008, the

property market had soared to loony heights as a result of unbridled speculation

by lonesome individuals as well as commercial groups.

The housing mania gripped not only the countries drowning in a sea of easy

money, but their neighbors as well. After bidding up the prices of local properties

for years on end, the opportunities in the domestic market became more scarce.

Due to the slim pickings, the punters ventured farther afield into foreign locales in


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order to make use of the mounds of cash on hand or to park the profits bagged to

date.

As an example, buying up properties at home and abroad became a national

pastime in Britain and Ireland. In fact, a bunch of television shows cropped up in

order to cater to the newfound zeal for snapping up properties at home and

abroad. The programs were so popular that some of them were even syndicated

and aired in neighboring countries.

The upsurge of real estate went hand in hand with a boom in financial products.

In countries such as the U.S. and Britain, the financial sector made up an

oversized share the domestic economy. Moreover, the players in the market

reveled in a bacchanal as they scooped up their fair share, and a lot more

besides, from the deluge of money sloshing around the marketplace.

Each time a bucket of cash changed hands, a bunch of attendants would dip into

the pool and scoop up a portion of the booty in the form of commissions of one

sort or another. In addition to the transactions conducted by local citizens, the

financial sector catered to a large population of foreign clients as well. As a

result, the aliens also brought in gobs of business which in turn led to scads of

profits for the happy campers in the financial sector.

A good portion of the bounty was send abroad in order to buy second homes for

holidays and additional properties for speculation. For this purpose, the most

popular destinations ranged from coastal Spain and western Latvia to southern

Greece and eastern Bulgaria.

All too often, though, the eager beavers were happy to snap up mass-produced

properties marked by cramped quarters in overgrown developments hawked at

stupendous prices. Yet anyone who had looked over the project with a cool head


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could have seen that a lot of the properties were priced far beyond the bounds of

sanity.

As a result, the return on investment for the holidaymaker-cum-speculator made

no sense at all. In many cases, a rental property would offer an income stream

each year that was merely a couple of percent of the principal invested, after

taking into account the cost of upkeep.

By contrast, the bond market would have made a far better choice. With a lot less

busywork, a punter could have earned an income that was several times larger.

By buying a bunch of bonds issued by a leading company, the gamer could have

enjoyed a steady stream of dividends with no effort at all.

Based on the value for money or more precisely, the lack of such it was clear

that hordes of foreigners were buying up heaps of real estate without ever setting

foot in the locality. Rather, the so-called investors purchased the properties from

afar, based solely on the glossy brochures whipped up by rabid promoters.

Many a zealous buyer plonked down plump deposits for properties under

construction which never came to match the specs on paper. Worse yet, there

were horror stories in which the promoter would abscond with the down

payments for a project which had never secured the permits required to break

ground, let alone build a structure of any sort.

The spur behind the housing mania was the mere fact that property prices had

been soaring through the roof. In the buildup to the financial crisis of 2008, real

estate was vaulting by 10 to 20 percent per annum in a raft of hotspots. In some

cases, the upsurge exceeded 30 or 40 percent within a single year!


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Money Pump

As we noted earlier, the frenzy was fueled by the tsunami of money pumped into

the financial system. The purpose of the inundation was to oil the gears of the

finance and commerce, and thereby shore up the economy as it struggled to

shake off the last recession.

In line with custom, the previous blowup had also been the outgrowth of another

bubble. During the late 1990s, the stock market had been propelled to ditsy

heights by the hysteria over any firm that claimed to have some kind of affinity for

the Internet.

When the feeding frenzy ran out of steam in early 2000, the aftershock was

severe enough to knock down the economy as well. Here was another example

of the bondage between the financial forum and the tangible economy.

In the years to follow, the deluge of money pouring into the financial system

made its way into the real economy. On the upside, the tidal wave buoyed the

level of commercial activity.

On the downside, though, the groundswell created a bubble in the housing

market. The hoopla in real estate was buttressed by a mania in the financial

forum for mortgage-based products.

In a host of countries ranging from the U.S. and Ireland to Spain and Ukraine, the

housing market was propelled to dizzy heights. As a result, the property sector

was distorted way out of proportion in relation to the income level of the local

population.


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The froth would have to subside, and the market implode, if real estate were to

regain its equilibrium. In 2009, the housing sector did in fact tumble by one-half

or more in certain locales. On the other hand, the prices in the erstwhile hotspots

would have to sink a lot more in order to reach some semblance of sanity.

Cloddish Measures

Another downer in the housing market was the monkey wrench tossed into the

sector by a mass of timid politicians. Instead of aiding the process of recovery,

the politicos in their infinite wisdom did precisely the opposite.

What the lawmakers should have done is to let the price level drop to its natural

level in a free market. In that case, the resulting comedown of the market would

serve to clear out the mountain of surplus housing whose main defect was a

bloated price tag.

The removal of excess inventory would flush out the pipeline. Without the

overhang of unwanted housing, a cohort of newborn buyers would enter the

market before long and restore the prices to reasonable levels.

The newfound demand would then draw the construction firms back into the

business. As a result, a parade of freshly built properties would come on stream

at a measured rate that can be absorbed by the market without causing

indigestion.

Given this backdrop, the best course of action was to leave the market alone. In

that case, the turnout would have been a sharp but short downturn in the housing

sector. After the brief takedown, the property market as well as the overall

economy would have shaken off the doldrums and regained their footing within a

year or so.


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Sadly, though, the politicos opted for a clumsy scheme that would hobble the

property market for many years to come. For this reason, the economy as a

whole was doomed to flounder in a mire of equal duration.

An overdose of government meddling had brought on the housing bubble in the

first place. And now an excess of intervention was choking the economy.

In this milieu, an example of a perverse measure was the custom of propping up

the speculators at the expense of the taxpayers. For instance, a bailout of billions

of dollars would be injected into a blighted bank that had issued a slew of

mortgages to penniless gamblers in the housing market.

By propping up an insolvent bank, the government enabled the lender to hang on

to the junky portfolio of properties which it had repossessed from bankrupt

customers. As a result, the bankers could prolong the malaise in the housing

sector by keeping the asking prices at inflated levels rather than selling off the

properties at once at the natural levels that would prevail in the absence of

artificial support by the government.

The nutty program of public policy catered to a horde of reckless speculators,

numbering in the millions, who had scooped up properties at loony prices while

taking on massive loans far beyond their ability to repay in future years. The

gamblers of this stripe included the jobless and the destitute who would each

snatch up multiple houses on sheer credit, without having to pay any kind of

deposit.

In fact, some of the punters received loans in excess of 100% of the purchase

price. In other words, the bettors were paid a cash bonus for engaging in

reckless behavior. The absurd scheme sprang from the passion of the banksters

for issuing as much debt as possible in order to collect the biggest commissions

on the loans.


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Comparing the Warpage

The monstrous scale of the housing mania showed up clearly on variousmeasures of affordability. By way of comparison, we will take as a baseline the

reasonable cost of housing in Germany, the powerhouse of the European

economy at the dawn of the millennium.

In the capital city of Berlin, the average price of homes in 2010 came out to 2.97

times the mean income for the population. Meanwhile, the average mortgage

amounted to 22.2% of the income level. Based on these and other factors, the

index of affordability was reckoned to be 4.51 units: a comfortably high value.

By contrast, the situation was ghastly in a slew of countries round the world. In

the U.S., for instance, the ratio of the average price to the income level came out

to a whopping 8.24 in 2010. Moreover, the mortgage as a fraction of income

topped 65%. As a result, the yardstick of affordability turned out to be a mere

1.53%.

The situation was far worse in a raft of other locales. One of the extreme cases

although not the worst, by a long shot was Ukraine.

In the capital of Kiev, the quotient of price to income for the housing market

turned out to be 27.84. Meanwhile the average mortgage required over 515

percent (not a typo!) of the mean income per capita. As a result, the affordability

index was a puny 0.19 units (Numbeo, 2010).

To round up, the property market in many countries continued to be overpriced

for years after the financial flap of 2008. A big reason for the gross distortion lay

in the misguided policy of the government for keeping the housing sector on life


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support. Given the extent of the bloat along with the props in place, real estate

would not return to a state of normalcy anytime soon.

Waiting for Inflation

If the price level is not allowed to fall of its own accord, then the market has to

wait for the rest of the economy to catch up. More precisely, the creep of inflation

slowly erodes the value of a property until the relative price is low enough to

attract a prospect with sufficient buying power.

As the cost of living rises, the value of real estate sinks on a relative basis even if

the price remains the same in an absolute sense. If the bubble in the housing

sector had been modest, then the process of adjustment might have run its

course within a year or two.

Sadly, though, the housing craze was hugely overdone and the market grossly

contorted. As a result, the warpage would require many years to unwind.

Once the cost of housing returns to a semblance of sanity, then a fresh crop of

newborn customers will be able to buy homes without undue hardship. At that

stage, the extreme distortions in real estate will have unraveled in earnest.

In that case, the property sector will recover its health and regain its poise. The

housing market will once again resume its role as a vital component of the

economy rather than a crushing burden on productive activity.

Unfortunately, that happy day will not come about anytime in the near future. In

the most twisted markets of the world including the hotspots in the rich

countries as well as their ransacked neighbors the property market will have to

stagger along for years on end.


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As a result, the economy as a whole is slated to grow at a couple of percent a

year at most in the blighted countries with the worst outbreaks of delirium during

the go-go years of the housing bubble. Another downside is the custom of

accepting the statistics on the financial forum and the real economy at face

value.

In particular, a host of statistics reported on the evening news are not quite what

they appear to be. The figures might be sobering, but they will in fact paint a

rosier picture than the underlying reality.

In other words, the situation will be worse than the image of decent growth

sketched out by the numbers in the headlines. As a rule, the data on economic

output are misleading due to the habit of ignoring the impact of population growth

in addition to inflationary drag.

Tricky Data on Economic Growth

In many countries round the world, the population is prone to expand over time.

In the wealthy nations, the mainspring of demographic change is found in

immigration.

On one hand, the birth rate in a mature economy is wont to be less than the

replacement rate of 2.1 children per woman: the figure required to maintain a

stable population. On the other hand, the deficit is usually more than made up by

the surfeit of immigration over emigration.

As a result, the population tends to grow over time. At the dawn of the 21st

century, for instance, the net increase in the U.S. has been about 0.97 percent a

year. Meanwhile the corresponding figure for Ireland comes out to 1.01 percent.


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In the poor countries of the world, the wellspring of demographic change lies in

the prodigious rates of birth. As a result, the population has been growing by 3

percent a year or more in a number of countries in Africa and the Middle East.

The pace of growth for humankind as a whole of course lies somewhere in

between the extremes of expansion and shrinkage. On a global basis, the world

population has been growing at a rate 1.13 percent a year (Central, 2010).

The demographic trend has an obvious relationship to the pace of economic

growth. More precisely, the global economy has to grow by more than 1 percent

per annum just to ensure that the average level of output per person remains

constant.

A second, and related, factor lies in the close linkage between the aggregate

volume of production and the mean level of income. Given the tie-up between

productivity and prosperity, the gross world product (GWP) has to increase

steadily in order to ensure that people to not grow poorer on average.

In this setting, the nominal pace of growth has to be adjusted for population as

well as inflation. To bring up a concrete example, suppose that the change in the

absolute value of the gross domestic product (GDP) for the U.S. came out to 4 %

over the past year. Meanwhile, we will assume that the inflation rate was a mere

2% over the same period.

In addition to the cost of living, we need to take into account the uptick of about

1% in the size of the population. After adjusting for inflation as well as

demographics, the GDP per person has crept upward by only 1% over the past

year.

To sum up, the headline figure namely, the growth rate of 4% reported by the

government or some other organ may seem at first glance like a respectable


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figure. Upon closer inspection, though, the population as a whole would have

seen their living standards crawl upward by just one-quarter of the amount that

was proclaimed.

In other words, Americans would scarcely feel any richer from one year to the

next. On the contrary, a lot of folks may feel as if their living standards have been

slipping rather than rising.

The denizens of wealthy countries will look wistfully at the income levels surging

by 10 or more per year in the sprouting regions. The disparity in growth rates is

sure to be humbling and disquieting.

On a positive, though, the denizens of wealthy nations can find solace in the fact

that they are still far richer on average than their counterparts in the budding

countries. Moreover, the lead in affluence will not fully disappear within the next

couple of generations at least.

In sum, its important to keep in mind the true import of the numbers reported by

government agencies or other sources of information. All too often, things are not

what they seem at first blush.

Future of Interest Rates

Due to the frail health of the overall economy, the rich countries are in no position

to jack up the basic rate of interest in a serious way. For this reason, short-term

rates including those on offer at commercial banks will scarcely budge over

the next year or two.

Granted, the central banks will begin to nudge up the cost of money in small

steps by 2012. Despite the shift in policy, though, interest rates will not change

by much for years to come.


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Admittedly, there will be a few exceptions to the general rule. In particular, the

nations endowed with a plethora of natural resources will benefit greatly from the

upgrowth in the emerging markets.

An example in this vein is Australia or Canada, which has vast stockpiles of

mineral resources earmarked for foreign markets. In these fortunate countries,

the interest rates could rise by an additional 1% or so in each of the next couple

of years.

Forecast of Stock Markets

The stock markets of the world were bludgeoned during the financial crisis of

2008. In the months to follow, the bourses recovered from the trauma to some

extent.

On the other hand, the markets tumbled even further in spring 2009 as the global

recession sent the investing public into a rout. As is often the case, the state of

the economy at the time rather than the outlook downrange was the hammer

that slammed the bourse.

At that stage, a thoughtful appraisal of the marketplace would have noted the

sturdy trends in place in diverse parts the world. On the other hand, the bulk of

investors chose to retreat to the apparent wisdom of hoary bromides.

As an example, a popular refrain among the talking heads in the financial media

was the dependence of China on the American market. When the U.S. catches a

cold, so the jingle went, China keels over with the flu.


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The old saw might have been valid in days of yore, when the U.S. was the

preeminent engine of the global economy. Moreover, China in the olden days

had little in the way of a domestic market that could absorb the mountain of

produce if exports to the West were throttled by a sudden cutback of demand in

overseas markets.

Slowly but steadily, though, the economic environment had been changing.

Unbeknownst to the mass of pundits ensconced in their armchairs half way round

the world, the internal market within the Middle Kingdom had been blooming at a

sturdy rate. This time around, the domestic economy was robust enough to

weather a global recession with only a minor pullback.

In addition, the volume of trade amongst the emerging nations had been

expanding at a healthy clip. A global takedown might dent the worldwide uptrend,

but the tripup was unlikely to last more than a couple of quarters amongst the

most sprightly nations.

Thanks in large measure to the resilience of the budding markets, it was

apparent to a mindful investor even in the spring of 2009 that the global economy

was destined to get back on its feet by the autumn that year. As things turned

out, the rebound was even quicker than that.

By the time summer rolled around, a raft of cues cropped up to signal the end of

the worldwide recession. The level of economic activity began to creep upward

once more in the West and North as well as the East and South.

If the common wisdom had been valid in spring 2009, then the stock market

should have correctly presaged the bounceback of the economy less than half a

year downrange. In other words, the bourse would have risen smartly from the

smackdown in the autumn of 2008 rather than fallen flat the following spring.


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As things turned out, the market slipped into the abyss and plunged even lower

in early 2009. The perverse behavior showed that the market was reacting to the

latest spate of news at the time rather than fulfilling its alleged role of auguring

the recovery down the line.

During the latest flop that spring, benchmarks of all stripes outdid themselves in a

race to the bottom. Even the sedate yardsticks of corporate titans such as the

Dow Jones Industrial Average or the S&P 500 index sank to newfound lows

that were less than half their values at the peak prior to the onset of the financial

crisis. As is their wont, the investing public stomped on the bourse far beyond the

levels justified by a realistic appraisal of the conditions downstream.

As we noted earlier, the mature economies recovered their footing within a few

months of the fresh lows on the bourse. Meanwhile, the sprouting nations began

to regain their stride as well. By 2010, the vanguards such as China and India

were once again streaking ahead at a breezy clip.

In the absence of big surprises, there is no good reason to suppose that the

pacesetters will run out of steam anytime soon. On the contrary, the advance of

the spearheads will help to carry along the slowpokes in the mature regions.

A case in point is the good fortune of Germany, the main engine of growth in

Europe at the dawn of the millennium. The stalwart has trudged ahead on the

strength of exports to the budding countries. The trade in goods is spotlighted by

the capital equipment needed to run factories or the upscale cars to transport the

newly rich.

The boom in emerging markets has also been a boon for the likes of Australia

and Canada. Thanks to an abundance of natural resources within their vast

borders, the endowed nations export mounds of raw materials needed for the

industrialization of the nascent regions.


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In fact, the exporting states will continue to prosper over the years and decades

to come. For this reason, the bourse as well as the currency in each of these

countries will clamber upward in tandem.

On the downside, though, the majority of mature countries are destined to crawl

along rather than zoom ahead. The nations in this camp span the gamut from the

U.S. and Britain to Hungary and Japan.

On a positive note, a glint of light beckons amid the general gloom in the sluggish

countries. The bright streak lies in the sweet spot of the election cycle in the U.S.

As a rule, the third year of the Presidential term is by far the most fruitful period

for the stock market. In an effort to appease the voting public, the administration

in office pulls out all the stops in an effort to pump up the economy.

During the run-up to the elections of 2012, it would be normal for the stock

market to enjoy a hefty upsurge. For this reason, 2011 is slated to be a buoyant

spell for the bourse.

The likely outcome is a rise of 15% or so for the S&P 500 index over the course

of the year. The benchmark closed out 2010 at a value of 1,257.64 points. In that

case, a rise of 15% would bring the yardstick to 1446 at the end of 2011.

To keep things simple, we can round up the target figure to 1450. That forecast

happens to be a tad on the high side compared to the prevailing view in the

marketplace.

As an example, a survey of 11 strategists by Bloomberg News resulted in an

average estimate of 1,374 for the S&P 500 index at the end of 2011 (Xydias and


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Kisling, 2010). The prediction corresponds to a rise of some 9% over the course

of the year.

For its part, the Dow Jones benchmark should turn in a comparable performance,

albeit a tad lower. A reasonable estimate for the yardstick is an increase of 13%

for the year.

Meanwhile, the Nasdaq Composite is apt to rise a bit more in order to make up

for the horrific smashup after the Internet bubble popped in early 2000. For this

reason, a likely target is a surge of 20% over the course of 2011.

The groundswell in America will of course pull along the other bourses of the

world as well. Among the vanguards in the budding regions, we would expect the

stock markets to soar by two or three times the amount in the U.S.

As an example, the emerging markets as a group comprising China, India,

Brazil and Russia are apt to rise in excess of 30% over the course of 2011.

Meanwhile, some of the best performers in the sprouting regions should soar by

more than 50% as the year wears on.

World Outlook for 2011 and Beyond

The prospects for the world economy as a whole lie about halfway between the

extremes of the mature countries and the budding regions. In line with earlier

remarks, we would expect the wealthy economies to grow by 2 or 3 percent per

annum on average over the next few years. Meanwhile, the budding markets will

bloom at a rate of 6 or 7 percent on average. Based on these figures, the global

economy should blossom by 4.5% or so per year.


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As we noted earlier, the stock markets of the world will fare far better on average

than the real economy. If the U.S. market grows by 15%, then a benchmark of

budding markets should reach the ballpark of 40%.

Looking further ahead, the American bourse will lose a lot of zip in the

subsequent years. As an example, the S&P 500 index could rise by just 10% or

so per year on average during the stretch from 2012 to 2015.

As a result, the markets elsewhere will also lose some of their mojo. Despite the

slowdown on the bourse, however, the real economy should continue to trundle

along at a measured pace.

The outlook for the stock markets in 2012 happens to be closer to their

performance in 2010 rather than 2011. Although the rate of growth will decline

slightly, the nimble investor in the global marketplace can look forward to healthy

gains even so.

Roundup of Forecasts

On the whole, the global economy is poised to expand by 4.5% or so over the

course of 2011. The same is true of the pace of growth for much of this decade.

As usual, however, the headway will vary greatly from one locale to another.

Mature economies such as the U.S. will expand by only a couple of percent per

annum after adjusting for inflation.

Moreover, roughly 1% of the increase will be due to a buildup of the population;

namely, the net influx of immigration over emigration. As a result, the rate of

productivity will creep upward by a mere 1% or so a year. The same is true for

the average level of income.


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Xydias, A., and W. Kisling. The Stock Rally May Still Have Legs in 2011.

2010/12/29. http://www.

businessweek.com/magazine/content/11_02/b4210042426222.

htm?chan=magazine+channel_news+-+markets+%2B+finance tapped

2011/1/21.

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forecast,stock market,economy,2011

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