Yoshikami: An Irrational 13% Market Rise in 2011

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.

Jan Mammey | Stock4B | Getty Images

I believe for the US economy that moment is coming in the next 2 to 3 years. Mr. Roach used the term "trick" during our discussion to describe current policies designed to encourage consumers and businesses to spend. The implication is that sentiment is being driven by policies designed to improve sentiment but not the underlying economy. We think this perspective is spot on.

The United States does NOT need to end up like like Greece or Ireland or any other hobbled nation. We have the benefit of a currently resilient currency and an economy that is the envy of many. But to continue to be relevant, the United States must remake itself into not merely a nation of consumers but instead a nation of innovation and production. It's true the low-cost manufacturing is forever outsourced to countries with low wage rates but that doesn't mean the United States cannot be a production powerhouse. The key is finding the right goods to produce.

Renewable energy, technology, consulting services, and high end manufacturing can help the United States move forward if the right business and political will is put in place. General Electric get this transition and that is why they continue to acquire companies that will help them compete globally in tailwind sectors. And companies like Honeywell and YUM are tapping into growth in China. Industrial conglomerates and fast food vendors; yes there are many way to tap into global growth. The United States' future depends on choices made now by companies. And governments need to adopt policies to helps companies succeed. Let's hope that in the stampede to give away tax cuts to every American, this is not forgotten.


The truth is that even in a troubled economy headed towards its day of reckoning, markets can still advance. This is why we believe US equity markets will rise 13% in 2012. So short-term, we remain optimistic that the current rally in equities will continue. But understand that as the rally plays out, this does not mean all is well with the economy; far from the truth. What America needs is not an orgy of spending and debt but instead a refocus on the basic old-fashioned principles of saving, reduction of debt, and innovation. America can win, but the clock is ticking.

Reality can't be ignored forever.

Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.