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Outlook for 2011: Slow and Unsteady as She Goes


The outlook for the U.S. economy in 2011 appears to be ... slow and unsteady as she goes.

Equity markets will continue to rebound in 2011 and the gross domestic product of the economy will grow between 2% and 3%, experts predict. But high unemployment will persist, as will volatility in financial markets.

If the U.S. economy grows at Goldman Sachs' forecast of 2.7% in 2011 and 3.6% in 2012, this will represent three years of "respectable growth," said Heather Shemilt, managing director and head of the pensions, endowments and foundations group at Goldman Sachs. In the first three quarters of this year, the U.S. GDP has grown 2.63%.

Looking abroad, Goldman projects global GDP growth of 4.5% in 2011 and 4.8% in 2012.

Shemilt also noted that the S&P 500 Index is up 12.73% this year. Emerging markets investments have risen 12%. Goldman projects that the S&P 500 will deliver another 12% in 2011 and 11% in 2012.

Right now, the earnings outlook is encouraging-and price multiples are low. Stocks in the S&P 500 are trading 13 times 2011 earnings. Bank of America Merrill Lynch projects the S&P 500 will trade at 15 times earnings by the end of next year, and RBS expects Europe's Stoxx 600 Index, currently trading at 11.3 times, will rise to a multiple of 12 by year-end 2011.

"Earnings are still the horse that will drive the market, but now there is another horse to help pull the wagon. The new horse on the team is the P/E multiple expansion," said Dan Genter, CEO and CIO of RNC Genter Capital Management.

Like BoA, Genter also expects S&P 500 to trade at a multiple of 15 in 2011. "The extension of the current tax levels is a huge functional and psychological stimulus, which may allow P/Es to expand to 15x on 2011 earnings of $90," he said. Next year now possesses share price growth potential of more than 12%, with the S&P ending 2011 over 1,350, he said.

Harvey Neiman, portfolio manager of the Neiman Large Cap Value Fund, believes earnings and revenues will increase as consumers gradually return to pre-recession shopping levels and investors return to equities.

"There are opportunities for a surprising change in 2011," said Dan Chung, CEO and CIO of Fred Alger Management. "If investors come back to U.S. equities, that would be a strong bullish sign for the markets."

Recent increases in The Conference Board Leading Economic Index for the U.S. could portend investors' return to stocks. It increased 1.1% in November to 112.4, following a 0.4% increase in October and a 0.6% increase in September. The index is based on 10 components, including average weekly initial unemployment claims and new manufacturing orders for consumer goods and materials.

"November's sharp increase in the Leading Economic Index, the fifth consecutive gain, is an early sign that the expansion is gaining momentum and spreading," said Ataman Ozyildirim, an economist with The Conference Board.

"Nearly all components rose in November. Continuing strength in financial indicators is now joined by gains in manufacturing and consumer expectations, but housing remains weak," he said.

Ken Goldstain, another economist with The Conference Board, agreed that the economy is showing improvement, but had a more muted outlook, calling the "sparks of life" in the economy "mild" and warning that housing and employment still need to improve.

Likewise, Robert Zagunis, co-portfolio manager of the Jensen Portfolio, doesn't expect earnings to increase due to consumer or corporate spending but because of operational efficiencies achieved from cutbacks made during the recession.

"Our investment expectations do not rely on robust consumer spending or on aggressive capital spending by businesses," Zagunis said.

James Dailey, CIO of TEAM Financial Managers, shares this cautious optimism. "The U.S. and global economy is poised to reaccelerate after suffering a mid-cycle slowdown from late spring into the late fall," Dailey said. "While the economy is likely to grow at a faster rate, it will not be enough to make a significant dent in the unemployment picture. This will result in the Federal Reserve's fiscal policy remaining very favorable for equity and commodity markets."

Russ Koesterich, managing director and chief investment strategist at iShares, says it is likely that the U.S., Europe and Japan will "limp along with uninspiring but improving recoveries" in 2011. He predicts sluggish GDP growth of 1.5% to 2.5% in developed nations.

In addition, the majority of money managers do not expect market volatility to subside. Should the European crisis spread to Spain, experts warn that could upset the markets in the euro-zone. Other threats: China's monetary policy, potential inflation in emerging markets and the failure of U.S. quantitative easing to create jobs. "There remain a wide number of crises that are in the making, including the [financial crisis] in Europe and what could end up being inflation and political crises in some major emerging markets like China," Dailey said.