If 2010 taught us anything about investing, it should be this: stocks markets don’t follow the overall mood of an economy. You would think last year’s double-digit unemployment, crumbling housing prices, massive economic stimulus plans and fears of a double-dip recession would have forced down equities. Instead, the S&P 500 rose more than 12 percent last year.
Stock markets are always looking ahead, though, and forecast appears rosy in 2011. Here are three reasons why we might see another banner year for equities:
1) Hot money. The Federal Reserve’s quantitative easing program is designed to pump more money into the financial system. In theory, this money will spur lending by banks, which would allow businesses to expand and start hiring with abandon. In reality, employers are still wary of hiring or investing in expansion. That leaves a whole lot of fresh cash sitting on the sidelines. Why sink it into government bonds when you could dump it into high-yielding blue chip dividend stocks?
2) The double-dip is dead. Fears over a double-dip recession have all but disappeared. That should be a warning sign for contrarian investors, but it just might encourage the bulk of the public to re-invest in stocks. “The investing public in the United States has been massively underinvested in equities, with U.S. equity mutual funds experiencing three consecutive years of net redemption,” Chen Zhao writes in the Financial Post. “Once investors regain confidence in the economic recovery, they will likely move their capital away from bonds into equities.”
3) Booming exports. A falling dollar has made U.S.-produced goods more attractive on the global marketplace and that contributed to some 2 to 3 percent of the annual U.S. GDP growth last year. Exports through November of 2010 grew 17 percent over 2009′s numbers, according to U.S. Commerce Undersecretary Francisco Sanchez. More exports means bigger earnings for American companies.
It’s also important to remember that it’s becoming increasingly difficult to think of an American company as an American company. More than half of Citigroup Inc.’s (NYSE:C) revenue comes from outside the U.S., for instance, and other banking giants like JPMorgan Chase & Co. (NYSE:JPM) are eagerly expanding into the Asia-Pacific region.
So while 9 percent of Americans are unemployed, the country’s biggest corporations will keep churning out record profits on the back of a weak dollar. That might not be good for Main Street, but it’s probably good for Wall Street, and I imagine that will keep the cash spigot flowing in Washington – no matter what the consequences are in the years to come.
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