We expect equity markets to rise 13% in 2011 for the following reasons:
- QE1 and 2 has flooded the system with money and liquidity will spur economic growth (1 trillion USD plus)
- Extension of the Bush tax cuts will likely add 3/4% to GDP (900 billion USD deficit spending)
- The third-year presidential cycle tends to be positive for investors as politicians attempt to please future voters
- The weak dollar relative to Asian currencies will continue to fuel export growth as indicated by the recent narrowing of US trade deficits (from a revised $35.7 billion to $32.9 billion)
As a market strategist I'm asked often to provide my views on market conditions and the economy. You can see my predictions on CNBC.com. It's clear to me that sufficient tailwinds exist to push equity markets forward to higher levels in 2011. As an investor we think it's important to take advantage of opportunities regardless of the reasonableness of market rises.
Contrast this optimistic view with our perspective on GDP growth in 2011.
I am on record as saying we believe GDP growth sans artificial stimulus will likely be under 2%.
What this means is that while GDP growth may be reported at 3% or 4%, a significant portion of this GDP burst will be related to the printing of money and the unprecedented moves by the Federal Reserve to lubricate the economy.
It's a simple formula; if you give away free money, growth will likely follow. But the real question is not current GDP growth but what the sustained growth rate will be without stimulus (particularly given rising deficits).
The understandable concern that many have (and I share) is what the future will look like with an economy hobbled by debt and a lack of resolve by elected officials to make difficult spending decisions. I fear the future in a world where denial reigns and hard choices are not made. In a recent interview on CNBC, I discussed with Stephen Roach of Morgan Stanley current conditions and we shared the same view that economies and leaders cannot continue to procrastinate; a moment of reckoning is inevitable.