8/7/2019 Forecast,Stock Market,Economy,2011
1/31
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
8/7/2019 Forecast,Stock Market,Economy,2011
2/31
1
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
* * *
8/7/2019 Forecast,Stock Market,Economy,2011
3/31
2
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.
8/7/2019 Forecast,Stock Market,Economy,2011
4/31
8/7/2019 Forecast,Stock Market,Economy,2011
5/31
8/7/2019 Forecast,Stock Market,Economy,2011
6/31
5
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.
8/7/2019 Forecast,Stock Market,Economy,2011
7/31
6
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.
8/7/2019 Forecast,Stock Market,Economy,2011
8/31
7
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.
8/7/2019 Forecast,Stock Market,Economy,2011
9/31
8
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.
8/7/2019 Forecast,Stock Market,Economy,2011
10/31
9
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.
8/7/2019 Forecast,Stock Market,Economy,2011
11/31
10
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
8/7/2019 Forecast,Stock Market,Economy,2011
12/31
11
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
8/7/2019 Forecast,Stock Market,Economy,2011
13/31
12
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!
8/7/2019 Forecast,Stock Market,Economy,2011
14/31
13
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.
8/7/2019 Forecast,Stock Market,Economy,2011
15/31
14
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.
8/7/2019 Forecast,Stock Market,Economy,2011
16/31
15
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.
8/7/2019 Forecast,Stock Market,Economy,2011
17/31
8/7/2019 Forecast,Stock Market,Economy,2011
18/31
17
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
8/7/2019 Forecast,Stock Market,Economy,2011
19/31
18
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.
8/7/2019 Forecast,Stock Market,Economy,2011
20/31
19
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.
8/7/2019 Forecast,Stock Market,Economy,2011
21/31
20
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
8/7/2019 Forecast,Stock Market,Economy,2011
22/31
21
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.
8/7/2019 Forecast,Stock Market,Economy,2011
23/31
22
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.
8/7/2019 Forecast,Stock Market,Economy,2011
24/31
23
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.
8/7/2019 Forecast,Stock Market,Economy,2011
25/31
24
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.
8/7/2019 Forecast,Stock Market,Economy,2011
26/31
25
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
8/7/2019 Forecast,Stock Market,Economy,2011
27/31
26
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.
8/7/2019 Forecast,Stock Market,Economy,2011
28/31
27
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.
8/7/2019 Forecast,Stock Market,Economy,2011
29/31
8/7/2019 Forecast,Stock Market,Economy,2011
30/31
8/7/2019 Forecast,Stock Market,Economy,2011
31/31
30
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.
* * *