It’s that time of year again when end of year reflection and New Year promises take center stage. Last year’s “Themes and Predictions” post proved to be more accurate than even I could have imagined. When doing these things, everyone must acknowledge the fact that most years are defined by the most unpredictable events. Sometimes these unpredictable events are bad, sometimes good, but for the most part what is most unexpected in advance is most descriptive after the fact.
For me, the idea behind such year-end prediction posts is not necessarily to be completely right. Rather, it’s to provide a reasonable framework from which to proceed into the New Year. As circumstances present themselves, it’s important to readjust should the anticipated events not pan out. For this reason, I have chosen to divide my year end predictions into two parts. First, are the “themes” and by that I mean the broad, general categories of discourse that shape the underlying specifics. Second are the actual predictions themselves. Where themes are broad generalized ideas, predictions are specific events or happenings themselves.
So without further ado, here are the themes that I think will shape 2011:
- Stock-selection will reemerge–Stock selection has always been important, but for the last two years market action has predominantly been driven by macro events. In 2011 the macro catalysts will recede from the front-and-center and market action will largely be driven on a stock-by-stock basis.
- The bandwidth crunch takes center-stage–As more people come online, smartphone growth continues and users consume ever-increasing quantities of bandwidth we will inevitably need a greater buildout of the web’s infrastructure. Who will ultimately pay for this buildout remains to be seen, but regardless it is inevitable. (i.e. will service providers pass these fees on to end-users?)
- The Great Deficit Debate–Just about everyone realizes that eventually the deficit is an issue that will have to be tackled. This just might be the single most talked about politico-economic topic with the least accomplished by year end.
And the predictions (in no particular order)…
- The S&P 500 (NYSE:SPY) will reach 1,500 by year end. Between earnings growth and the multiple expansion that will result from diminishing macro risk over the course of the year, the S&P will march higher. However, the tailwinds won’t fill all sails, as stock-specific catalysts will drive price action.
- The unemployment situation will start improving in early 2011 and will accelerate later in the year as the “unusual uncertainty” overhang slowly subsides.
- Biotechnology, a sector that has underperformed for years will finally reemerge as a hot investment. With more certainty about the impact of the impending patent-cliff and multiples compressed to some of the cheapest in the market, investors looking for both yield, value and growth can find their match in the biotech domain. Potential biotech investors will also realize that biotech ETFs (e.g., NYSE:XBI, NASDAQ:IBB, NYSE:FBT) provide a great way to mitigate some of the risks inherent to this sector. (See “The Next Big Thing in ETFs“)
- Crude oil (NYSE:USO) will have a powerful push upwards in the Spring that will attract much concern and attention; however, it will stop well short of what we saw in 2008 and have little long-term impact.
- Inflation will remain subdued in 2011 despite pervasive concerns. The reparation of private sector balance sheets is not finished yet and the government will not accelerate the rate of increase in its deficit. However, the concern over inflation will be a major catalyst in pushing stocks higher as people allocate more heavily to equities from bonds.
- Trading in the U.S. dollar will be the “non-event” of 2011. 2010 was the year of FOREX trading proliferation and generally when those trends hit the mainstream it’s time to start looking the other way. The dollar will spend much of 2011 stuck in a narrow range with random trading patterns that slowly erodes the portfolios and confidence of novice FOREX traders.
- Small to mid-cap semiconductor stocks will be some of the hot high-flyers of 2011. The transition to a more web-based world with smartphones, tablets, and content sharing abound opens the door for many new chip-based technologies. We are still in the early stages of this transition.
- Over the next year, M&A volume will increase substantially. This will be particularly so in the technology and financial sectors. Technology remains cash-rich and the flagship companies continue to pay little-to-no dividend, while financials have now healed their balance sheets enough post-crisis to make strategic acquisitions (in contrast to the panic-driven M&A of 07-09).
- The transition of media to a content-driven business will accelerate in 2011. Blogs will buy media companies and media companies will buy blogs to the point where the distinction becomes a moot point. People want on-demand content that suits their needs and companies that specialize in providing that content will continue to grow at a mighty pace.
- The social media IPO we’ve all been waiting for will FINALLY happen. Facebook will announce its intentions at some point in 2011 as the company’s private valuations have reached the point in which venture capital investors will want to cash out in order to pursue other newer, fresher opportunities. The company owes this to their early investors, who ultimately need public equity markets for the liquidity to exit.
- **And for a bonus, NFLPA and management council will reach a new collective bargaining agreement with comfortable time to spare as both sides realize there is far more to lose than gain in a strike situation.
What are your investing themes and predictions for 2011? Let us know in the comments below …
Disclosure: No relevant positions.