Outlook for 2011 and Beyond
The stock market and the real economy are interlinked in the present as well as the future, thus presenting a bundled system for forecasting. The global economy is slated to expand by some 4.5% in 2011, while the figure for the U.S. is about 2% in real terms. Moreover, the stock markets of the advanced economies are set to swell by around 15% during the year. By contrast, the pacesetters in the budding regions are on track to surge by 40% or more.
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In contrast to common perception, the stock market and the real economy are intertwined in the present as well as the future – a linkage which can serve as the basis for forecasting. The process is illustrated by way of a timely survey: a forecast of the stock market along with the global economy for 2011 and beyond.
On the whole, the volume of economic output is likely to expand by roughly 4.5% over the year to come. The same is true of the growth rate for much of this decade.
In line with the norm, though, the expansion will be patchy rather than uniform. For instance, mature economies such as the U.S. will grow by a mere couple of percent per year after adjusting for inflation.
Furthermore, about 1% of the increase will stem from the buildup of the population due to the net flow of immigration over emigration. In that case, the rate of productivity will creep upward by just 1% per year. The same outcome lies in store for the average level of income.
On the other hand, the spearheads in the emerging regions will gallop ahead at a blistering pace. In places such as China and India, the upsurge of economic output is set to reach 9% or more per annum.
Meanwhile, the exporters to the budding countries will fare somewhere in between the two extremes of growth. An example is found in Australia or Canada as exporters of raw materials. Another sample is Germany or Korea as suppliers of capital equipment or finished goods.
In the absence of any big surprises, the markets round the planet are destined to enjoy a refreshing upswing in 2011. Moreover, the outlook for the years to come is a bit less sparkling but still cheery even so.
On the upside, the winds of fortune smile upon the bourses of the world. During the run-up to the Presidential race, the U.S. government will whip up a storm of hubbub in a heated effort to fire up the economy.
For the most part, the hoopla will be a blast of hot air without much impact over the long range. Even so, any dumpage of money into the marketplace by way of fiscal programs or monetary schemes will serve to nudge up the volume of commercial transactions. In that case, the gush of spending is bound to be a tonic for the stock market, at least over the short and medium range.
As a result, the U.S. bourse is slated to surge by 15% or so over the course of 2011. Since the American market is a beacon for the rest of the world, the upswell will bolster other bourses throughout the planet.
Targets and Time Frames
According to received wisdom, the stock market is a harbinger of the real economy. If the bourse were to rise, for instance, then the upswing would signal a groundswell of economic activity in due course.
On the whole, the popular perception does make a good deal of sense. The investing public is prone to buy or sell equities depending on the outlook for corporate earnings roughly half a year down the line.
Moreover, the companies listed on the bourse represent a microcosm of the economy at large. For these reasons, the stock market reflects the vitality of transactions – along with the level of profits – in the business sector.
On the other hand, the tangible economy is a bulky object with a great deal of inertia. For this reason, the level of aggregate output tends to budge gradually rather than shift suddenly. Any disturbance within the system takes time to ripple through the vast chains of production and consumption.
The process of adjustment is apt to take at least 6 months in order to run its course. Not surprisingly, the stock market often precedes the market by half a year or so.
In the sections to come, we begin by probing the bondage between the stock market and the real economy. By contrast to the popular image, the two branches of the marketplace are intertwined not only in the future but the present as well.
The second task at hand is to build on the linkage while reviewing the conditions in the current environment. Although the review deals mainly with the outlook for 2011, the survey also touches on the prospects for the years to follow.
Bilateral Ties between the Present and Future
The long process of adjustment in the real economy has practical implications for the investor. If an upthrow rumbles through the meshworks of production and distribution for half a year or more, then the outcome downstream can be predicted in part by tracking the events taking place right now.
As an example, a sudden drop in the unemployment rate signals a surge in demand for labor. The clamor for workers is a healthy sign of expansion amongst the producers in the tangible economy. Moreover, the payout of wages will lead to a rise in spending power within the ranks of consumers.
As a result, the upswell in production as well as consumption is a booster for the entire economy. The groundswell of commerce lifts up all manner of companies including the ones listed on the stock market.
For this reason, the bourse is set to bound higher as investors absorb the news about a cutback in the jobless rate. In other words, the status of the economy in the present has a direct impact on the animal spirits of the equity market right now.
In the converse direction, a bombshell in the financial forum can influence the real economy as well. For instance, a crash of the stock market will pummel the equities held by the investing public. Moreover, the crackup on the bourse will hamper the ability of operating companies to raise capital through the issuance of common stock.
As a result, the flogging of consumers as well as producers trips up the entire economy. In this way, the health of the financial forum has a weighty impact on the status of the real economy.
To recap, the stock market often acts as a precursor for the real economy. In this sense, the bourse acts as a window on the future.
On the other hand, the current conditions in the economy play a vital role in the networks of production and consumption for months to come. For this reason, the health of the economy today is a prime factor in the vigor of the stock market.
Put another way, the stock market is not merely a passive augur of economic conditions down the line. Rather, the bourse and the economy are bound together in the present as well as the future.
Given this backdrop, a good place to start in forecasting the marketplace is to examine the latest trends in the economy as harbingers of the conditions downrange. The outlook for aggregate output can then be used to presage the course of the stock market as well.
Motley Features of Globalization
To an increasing degree, the fortunes of sovereign nations are tied to the fate of the global economy. On the upside, the tidal wave of world trade powers a groundswell of prosperity for all humanity.
Admittedly, the process of globalization produces a number of woeful side effects as well. In this respect, at least, the transformation is no different from any other type of change.
One of the thorny issues involves the revamp of the patterns of production and consumption. For instance, the vendors that can stamp out goods of higher quality or lower cost tend to prevail at the expense of their competitors.
On the other hand, the dislocations are not specific to the process of globalization. From a larger stance, creative destruction is simply part and parcel of the renewal that marks a dynamic economy.
If the wealth of the world is to increase, then the chains of production and consumption have to change over time. Although the dreamers may wish things to be otherwise, progress and stasis happen to be mutually incompatible. You can’t move forward by standing still.
In that case, the best that can be done is to lend a hand to the hapless souls who suffer the most as a result of the makeover. A sensible program of intervention is a vital issue that has brought forth a medley of sensible proposals as well as a lot of half-witted schemes.
On the other hand, a meaningful discussion of the best ways to deal with the stumbling block lies far beyond the scope of this survey. For our purposes here, it suffices to note that the bulk of the human population favors growth over stasis, advancement over stagnation, renewal over ossification.
In addition, the process of globalization will continue to soldier on regardless of any reasonable program of intervention by the policymakers or reactionaries. Granted, there will be an endless barrage of sideswipes and upsets from time to time.
The takedowns will result from a combination of willful acts, natural events, and societal forces. Despite the reversals, though, the march of progress will surely prevail over the long run.
Pace of Growth
Along with the rising tide of globalization, the world economy has been expanding with only temporary comedowns from time to time. An example of the latter was the global recession in the aftershock of the financial crisis of 2008.
On the bright side, even the countries at center stage during the financial flap recovered their footing with remarkable speed. A showcase lay in the United States, which showed palpable signs of recovery by the summer of 2009. Since then, the stalwart has continued to regain its strength and to recover a good chunk of lost ground.
The situation has been similar in other major countries. The players of this stripe span the gamut from Britain and Germany to Korea and Australia.
On the other hand, many other countries have had a rough time trying to shake off their torpor and pushing ahead at a respectable pace. The nations facing an uphill battle include mature economies such as the U.S. and Ireland as well as budding ones like Lithuania and Poland.
On the upside, however, the most dynamic countries were scarcely touched by the global blowup. After hitting a speed bump, the go-getters in the sprouting regions quickly resumed the heady pace of growth they had enjoyed prior to the trip-up.
A case in point lay in India. During the run-up to the financial flap, the gross domestic product (GDP) on the subcontinent surged by 9.9 percent in 2007.
The following year, the growth rate slipped to a “mere” 6.4 percent. As the global recession raged in 2009, the GDP slumped a bit further to 5.7 percent (International, 2010). By the following year, though, India was well on its way to reclaiming its former pep.
The situation was analogous in other parts of the world. In fact, all the major countries of the world began to clamber out of the global recession by the second half of 2009.
Looking Forward
The outlook for world growth over the next few years is more sunny than usual during the previous decade. A case in point is a forecast by the Organisation for Economic Co-operation and Development (OECD), a club of several dozen rich countries round the planet.
According to the chart below, the global economy will grow at rates in excess of 4 or 5 percent a year over the next couple of years (Gurría, 2010). Not surprisingly, the forecast ascribes the bulk of the growth to the emerging countries which do not belong to the OECD.
For each bar, the segment in light purple shows the contribution to the growth of global GDP by the countries in the OECD group. Meanwhile, the dark stripe denotes the portion due to the budding countries in the rest of the world.
Millstone on the Economy
In a host of countries across the globe, the housing sector has been a crushing burden in recent years. During the buildup to the financial blowup of 2008, the property market had soared to loony heights as a result of unbridled speculation by lonesome individuals as well as commercial groups.
The housing mania gripped not only the countries drowning in a sea of easy money, but their neighbors as well. After bidding up the prices of local properties for years on end, the opportunities in the domestic market became more scarce. Due to the slim pickings, the punters ventured farther afield into foreign locales in order to make use of the mounds of cash on hand or to park the profits bagged to date.
As an example, buying up properties at home and abroad became a national pastime in Britain and Ireland. In fact, a bunch of television shows cropped up in order to cater to the newfound zeal for snapping up properties at home and abroad. The programs were so popular that some of them were even syndicated and aired in neighboring countries.
The upsurge of real estate went hand in hand with a boom in financial products. In countries such as the U.S. and Britain, the financial sector made up an oversized share the domestic economy. Moreover, the players in the market reveled in a bacchanal as they scooped up their fair share, and a lot more besides, from the deluge of money sloshing around the marketplace.
Each time a bucket of cash changed hands, a bunch of attendants would dip into the pool and scoop up a portion of the booty in the form of commissions of one sort or another. In addition to the transactions conducted by local citizens, the financial sector catered to a large population of foreign clients as well. As a result, the aliens also brought in gobs of business which in turn led to scads of profits for the happy campers in the financial sector.
A good portion of the bounty was send abroad in order to buy second homes for holidays and additional properties for speculation. For this purpose, the most popular destinations ranged from coastal Spain and western Latvia to southern Greece and eastern Bulgaria.
All too often, though, the eager beavers were happy to snap up mass-produced properties marked by cramped quarters in overgrown developments hawked at stupendous prices. Yet anyone who had looked over the project with a cool head could have seen that a lot of the properties were priced far beyond the bounds of sanity.
As a result, the return on investment for the holidaymaker-cum-speculator made no sense at all. In many cases, a rental property would offer an income stream each year that was merely a couple of percent of the principal invested, after taking into account the cost of upkeep.
By contrast, the bond market would have made a far better choice. With a lot less busywork, a punter could have earned an income that was several times larger. By buying a bunch of bonds issued by a leading company, the gamer could have enjoyed a steady stream of dividends with no effort at all.
Based on the value for money – or more precisely, the lack of such – it was clear that hordes of foreigners were buying up heaps of real estate without ever setting foot in the locality. Rather, the so-called investors purchased the properties from afar, based solely on the glossy brochures whipped up by rabid promoters.
Many a zealous buyer plonked down plump deposits for properties under construction which never came to match the specs on paper. Worse yet, there were horror stories in which the promoter would abscond with the down payments for a project which had never secured the permits required to break ground, let alone build a structure of any sort.
The spur behind the housing mania was the mere fact that property prices had been soaring through the roof. In the buildup to the financial crisis of 2008, real estate was vaulting by 10 to 20 percent per annum in a raft of hotspots. In some cases, the upsurge exceeded 30 or 40 percent within a single year!
Money Pump
As we noted earlier, the frenzy was fueled by the tsunami of money pumped into the financial system. The purpose of the inundation was to oil the gears of the finance and commerce, and thereby shore up the economy as it struggled to shake off the last recession.
In line with custom, the previous blowup had also been the outgrowth of another bubble. During the late 1990s, the stock market had been propelled to ditsy heights by the hysteria over any firm that claimed to have some kind of affinity for the Internet.
When the feeding frenzy ran out of steam in early 2000, the aftershock was severe enough to knock down the economy as well. Here was another example of the bondage between the financial forum and the tangible economy.
In the years to follow, the deluge of money pouring into the financial system made its way into the real economy. On the upside, the tidal wave buoyed the level of commercial activity.
On the downside, though, the groundswell created a bubble in the housing market. The hoopla in real estate was buttressed by a mania in the financial forum for mortgage-based products.
In a host of countries ranging from the U.S. and Ireland to Spain and Ukraine, the housing market was propelled to dizzy heights. As a result, the property sector was distorted way out of proportion in relation to the income level of the local population.
The froth would have to subside, and the market implode, if real estate were to regain its equilibrium. In 2009, the housing sector did in fact tumble by one-half or more in certain locales. On the other hand, the prices in the erstwhile hotspots would have to sink a lot more in order to reach some semblance of sanity.
Cloddish Measures
Another downer in the housing market was the monkey wrench tossed into the sector by a mass of timid politicians. Instead of aiding the process of recovery, the politicos in their infinite wisdom did precisely the opposite.
What the lawmakers should have done is to let the price level drop to its natural level in a free market. In that case, the resulting comedown of the market would serve to clear out the mountain of surplus housing whose main defect was a bloated price tag.
The removal of excess inventory would flush out the pipeline. Without the overhang of unwanted housing, a cohort of newborn buyers would enter the market before long and restore the prices to reasonable levels.
The newfound demand would then draw the construction firms back into the business. As a result, a parade of freshly built properties would come on stream at a measured rate that can be absorbed by the market without causing indigestion.
Given this backdrop, the best course of action was to leave the market alone. In that case, the turnout would have been a sharp but short downturn in the housing sector. After the brief takedown, the property market as well as the overall economy would have shaken off the doldrums and regained their footing within a year or so.
Sadly, though, the politicos opted for a clumsy scheme that would hobble the property market for many years to come. For this reason, the economy as a whole was doomed to flounder in a mire of equal duration.
An overdose of government meddling had brought on the housing bubble in the first place. And now an excess of intervention was choking the economy.
In this milieu, an example of a perverse measure was the custom of propping up the speculators at the expense of the taxpayers. For instance, a bailout of billions of dollars would be injected into a blighted bank that had issued a slew of mortgages to penniless gamblers in the housing market.
By propping up an insolvent bank, the government enabled the lender to hang on to the junky portfolio of properties which it had repossessed from bankrupt customers. As a result, the bankers could prolong the malaise in the housing sector by keeping the asking prices at inflated levels rather than selling off the properties at once at the natural levels that would prevail in the absence of artificial support by the government.
The nutty program of public policy catered to a horde of reckless speculators, numbering in the millions, who had scooped up properties at loony prices while taking on massive loans far beyond their ability to repay in future years. The gamblers of this stripe included the jobless and the destitute who would each snatch up multiple houses on sheer credit, without having to pay any kind of deposit.
In fact, some of the punters received loans in excess of 100% of the purchase price. In other words, the bettors were paid a cash bonus for engaging in reckless behavior. The absurd scheme sprang from the passion of the banksters for issuing as much debt as possible in order to collect the biggest commissions on the loans.
Some of the lending sharks went out of their way to coax gullible folks into signing up for humongous mortgages. The dangers of the flimflam would have been plainly visible to any adult with a smidgen of knowledge about the housing market.
A borrower whose finances were stretched to the limit would clearly be unable to meet the installment payments as the years went by. After a spell of interest rates at abnormally low levels, the cost of borrowing was destined to bounce back to its usual range. In that case, the overstretched buyer would clearly be unable to service the mortgage.
The obvious outturn is a forfeit of the property to the issuer of the loan. After repossessing the asset, the bank would have to sell it off in order to recover what funds it could.
Due to the upsurge of interest rates, however, the installment payment on each dollar of credit turns out to be higher than before. For this reason, the same property becomes less affordable to prospective buyers than it was in the past.
In other words, the price will have to drop if the property is to be sold. If the asking price remains unchanged, then the property becomes a bigger deadweight on the housing market than it was prior to the hike in interest rates.
On a positive note, the housing sector could not help but pull back to some degree in the years to follow despite the government policy of propping up the property sector. On the downside, though, the fetters in place ensured that the excesses of the go-go years would not be corrected anytime soon. Rather, the housing sector would have to limp and thrash for many years to come.
Comparing the Warpage
The monstrous scale of the housing mania showed up clearly on various measures of affordability. By way of comparison, we will take as a baseline the reasonable cost of housing in Germany, the powerhouse of the European economy at the dawn of the millennium.
In the capital city of Berlin, the average price of homes in 2010 came out to 2.97 times the mean income for the population. Meanwhile, the average mortgage amounted to 22.2% of the income level. Based on these and other factors, the index of affordability was reckoned to be 4.51 units: a comfortably high value.
By contrast, the situation was ghastly in a slew of countries round the world. In the U.S., for instance, the ratio of the average price to the income level came out to a whopping 8.24 in 2010. Moreover, the mortgage as a fraction of income topped 65%. As a result, the yardstick of affordability turned out to be a mere 1.53%.
The situation was far worse in a raft of other locales. One of the extreme cases – although not the worst, by a long shot – was Ukraine.
In the capital of Kiev, the quotient of price to income for the housing market turned out to be 27.84. Meanwhile the average mortgage required over 515 percent (not a typo!) of the mean income per capita. As a result, the affordability index was a puny 0.19 units (Numbeo, 2010).
To round up, the property market in many countries continued to be overpriced for years after the financial flap of 2008. A big reason for the gross distortion lay in the misguided policy of the government for keeping the housing sector on life support. Given the extent of the bloat along with the props in place, real estate would not return to a state of normalcy anytime soon.
Waiting for Inflation
If the price level is not allowed to fall of its own accord, then the market has to wait for the rest of the economy to catch up. More precisely, the creep of inflation slowly erodes the value of a property until the relative price is low enough to attract a prospect with sufficient buying power.
As the cost of living rises, the value of real estate sinks on a relative basis even if the price remains the same in an absolute sense. If the bubble in the housing sector had been modest, then the process of adjustment might have run its course within a year or two.
Sadly, though, the housing craze was hugely overdone and the market grossly contorted. As a result, the warpage would require many years to unwind.
Once the cost of housing returns to a semblance of sanity, then a fresh crop of newborn customers will be able to buy homes without undue hardship. At that stage, the extreme distortions in real estate will have unraveled in earnest.
In that case, the property sector will recover its health and regain its poise. The housing market will once again resume its role as a vital component of the economy rather than a crushing burden on productive activity.
Unfortunately, that happy day will not come about anytime in the near future. In the most twisted markets of the world – including the hotspots in the rich countries as well as their ransacked neighbors – the property market will have to stagger along for years on end.
As a result, the economy as a whole is slated to grow at a couple of percent a year at most in the blighted countries with the worst outbreaks of delirium during the go-go years of the housing bubble. Another downside is the custom of accepting the statistics on the financial forum and the real economy at face value.
In particular, a host of statistics reported on the evening news are not quite what they appear to be. The figures might be sobering, but they will in fact paint a rosier picture than the underlying reality.
In other words, the situation will be worse than the image of decent growth sketched out by the numbers in the headlines. As a rule, the data on economic output are misleading due to the habit of ignoring the impact of population growth in addition to inflationary drag.
Tricky Data on Economic Growth
In many countries round the world, the population is prone to expand over time. In the wealthy nations, the mainspring of demographic change is found in immigration.
On one hand, the birth rate in a mature economy is wont to be less than the replacement rate of 2.1 children per woman: the figure required to maintain a stable population. On the other hand, the deficit is usually more than made up by the surfeit of immigration over emigration.
As a result, the population tends to grow over time. At the dawn of the 21st century, for instance, the net increase in the U.S. has been about 0.97 percent a year. Meanwhile the corresponding figure for Ireland comes out to 1.01 percent.
In the poor countries of the world, the wellspring of demographic change lies in the prodigious rates of birth. As a result, the population has been growing by 3 percent a year or more in a number of countries in Africa and the Middle East.
The pace of growth for humankind as a whole of course lies somewhere in between the extremes of expansion and shrinkage. On a global basis, the world population has been growing at a rate 1.13 percent a year (Central, 2010).
The demographic trend has an obvious relationship to the pace of economic growth. More precisely, the global economy has to grow by more than 1 percent per annum just to ensure that the average level of output per person remains constant.
A second, and related, factor lies in the close linkage between the aggregate volume of production and the mean level of income. Given the tie-up between productivity and prosperity, the gross world product (GWP) has to increase steadily in order to ensure that people to not grow poorer on average.
In this setting, the nominal pace of growth has to be adjusted for population as well as inflation. To bring up a concrete example, suppose that the change in the absolute value of the gross domestic product (GDP) for the U.S. came out to 4 % over the past year. Meanwhile, we will assume that the inflation rate was a mere 2% over the same period.
In addition to the cost of living, we need to take into account the uptick of about 1% in the size of the population. After adjusting for inflation as well as demographics, the GDP per person has crept upward by only 1% over the past year.
To sum up, the headline figure – namely, the growth rate of 4% – reported by the government or some other organ may seem at first glance like a respectable figure. Upon closer inspection, though, the population as a whole would have seen their living standards crawl upward by just one-quarter of the amount that was proclaimed.
In other words, Americans would scarcely feel any richer from one year to the next. On the contrary, a lot of folks may feel as if their living standards have been slipping rather than rising.
The denizens of wealthy countries will look wistfully at the income levels surging by 10 or more per year in the sprouting regions. The disparity in growth rates is sure to be humbling and disquieting.
On a positive, though, the denizens of wealthy nations can find solace in the fact that they are still far richer on average than their counterparts in the budding countries. Moreover, the lead in affluence will not fully disappear within the next couple of generations at least.
To recap, it’s important to keep in mind the true import of the numbers reported by government agencies or other sources of information. All too often, things are not what they seem at first blush.
Future of Interest Rates
Due to the frail health of the overall economy, the rich countries are in no position to jack up the basic rate of interest in a serious way. For this reason, short-term rates – including those on offer at commercial banks – will scarcely budge over the next year or two.
Granted, the central banks will begin to nudge up the cost of money in small steps by 2012. Despite the shift in policy, though, interest rates will not change by much for years to come.
Admittedly, there will be a few exceptions to the general rule. In particular, the nations endowed with a plethora of natural resources will benefit greatly from the upgrowth in the emerging markets.
An example in this vein is Australia or Canada, which has vast stockpiles of mineral resources earmarked for foreign markets. In these fortunate countries, the interest rates could rise by an additional 1% or so in each of the next couple of years.
Forecast of Stock Markets
The stock markets of the world were bludgeoned during the financial crisis of 2008. In the months to follow, the bourses recovered from the trauma to some extent.
On the other hand, the markets tumbled even further in spring 2009 as the global recession sent the investing public into a rout. As is often the case, the state of the economy at the time – rather than the outlook downrange – was the hammer that slammed the bourse.
At that stage, a thoughtful appraisal of the marketplace would have noted the sturdy trends in place in diverse parts the world. On the other hand, the bulk of investors chose to retreat to the apparent wisdom of hoary bromides.
As an example, a popular refrain among the talking heads in the financial media was the dependence of China on the American market. When the U.S. catches a cold, so the jingle went, China keels over with the flu.
The old saw might have been valid in days of yore, when the U.S. was the preeminent engine of the global economy. Moreover, China in the olden days had little in the way of a domestic market that could absorb the mountain of produce if exports to the West were throttled by a sudden cutback of demand in overseas markets.
Slowly but steadily, though, the economic environment had been changing. Unbeknownst to the mass of pundits ensconced in their armchairs half way round the world, the internal market within the Middle Kingdom had been blooming at a sturdy rate. This time around, the domestic economy was robust enough to weather a global recession with only a minor pullback.
In addition, the volume of trade amongst the emerging nations had been expanding at a healthy clip. A global takedown might dent the worldwide uptrend, but the tripup was unlikely to last more than a couple of quarters amongst the most sprightly nations.
Thanks in large measure to the resilience of the budding markets, it was apparent to a mindful investor even in the spring of 2009 that the global economy was destined to get back on its feet by the autumn that year. As things turned out, the rebound was even quicker than that.
By the time summer rolled around, a raft of cues cropped up to signal the end of the worldwide recession. The level of economic activity began to creep upward once more in the West and North as well as the East and South.
If the common wisdom had been valid in spring 2009, then the stock market should have correctly presaged the bounceback of the economy less than half a year downrange. In other words, the bourse would have risen smartly from the smackdown in the autumn of 2008 rather than fallen flat the following spring.
As things turned out, the market slipped into the abyss and plunged even lower in early 2009. The perverse behavior showed that the market was reacting to the latest spate of news at the time rather than fulfilling its alleged role of auguring the recovery down the line.
During the latest flop that spring, benchmarks of all stripes outdid themselves in a race to the bottom. Even the sedate yardsticks of corporate titans – such as the Dow Jones Industrial Average or the S&P 500 index – sank to newfound lows that were less than half their values at the peak prior to the onset of the financial crisis. As is their wont, the investing public stomped on the bourse far beyond the levels justified by a realistic appraisal of the conditions downstream.
As we noted earlier, the mature economies recovered their footing within a few months of the fresh lows on the bourse. Meanwhile, the sprouting nations began to regain their stride as well. By 2010, the vanguards such as China and India were once again streaking ahead at a breezy clip.
In the absence of big surprises, there is no good reason to suppose that the pacesetters will run out of steam anytime soon. On the contrary, the advance of the spearheads will help to carry along the slowpokes in the mature regions.
A case in point is the good fortune of Germany, the main engine of growth in Europe at the dawn of the millennium. The stalwart has trudged ahead on the strength of exports to the budding countries. The trade in goods is spotlighted by the capital equipment needed to run factories or the upscale cars to transport the newly rich.
The boom in emerging markets has also been a boon for the likes of Australia and Canada. Thanks to an abundance of natural resources within their vast borders, the endowed nations export mounds of raw materials needed for the industrialization of the nascent regions.
In fact, the exporting states will continue to prosper over the years and decades to come. For this reason, the bourse as well as the currency in each of these countries will clamber upward in tandem.
On the downside, though, the majority of mature countries are destined to crawl along rather than zoom ahead. The nations in this camp span the gamut from the U.S. and Britain to Hungary and Japan.
On a positive note, a glint of light beckons amid the general gloom in the sluggish countries. The bright streak lies in the sweet spot of the election cycle in the U.S.
As a rule, the third year of the Presidential term is by far the most fruitful period for the stock market. In an effort to appease the voting public, the administration in office pulls out all the stops in an effort to pump up the economy.
During the run-up to the elections of 2012, it would be normal for the stock market to enjoy a hefty upsurge. For this reason, 2011 is slated to be a buoyant spell for the bourse.
The likely outcome is a rise of 15% or so for the S&P 500 index over the course of the year. The benchmark closed out 2010 at a value of 1,257.64 points. In that case, a rise of 15% would bring the yardstick to 1446 at the end of 2011.
To keep things simple, we can round up the target figure to 1450. That forecast happens to be a tad on the high side compared to the prevailing view in the marketplace.
As an example, a survey of 11 strategists by Bloomberg News resulted in an average estimate of 1,374 for the S&P 500 index at the end of 2011 (Xydias and Kisling, 2010). The prediction corresponds to a rise of some 9% over the course of the year.
For its part, the Dow Jones benchmark should turn in a comparable performance, albeit a tad lower. A reasonable estimate for the yardstick is an increase of 13% for the year.
Meanwhile, the Nasdaq Composite is apt to rise a bit more in order to make up for the horrific smashup after the Internet bubble popped in early 2000. For this reason, a likely target is a surge of 20% over the course of 2011.
The groundswell in America will of course pull along the other bourses of the world as well. Among the vanguards in the budding regions, we would expect the stock markets to soar by two or three times the amount in the U.S.
As an example, the emerging markets as a group – comprising China, India, Brazil and Russia – are apt to rise in excess of 30% over the course of 2011. Meanwhile, some of the best performers in the sprouting regions should soar by more than 50% as the year wears on.
World Outlook for 2011 and Beyond
The prospects for the world economy as a whole lie about halfway between the extremes of the mature countries and the budding regions. In line with earlier remarks, we would expect the wealthy economies to grow by 2 or 3 percent per annum on average over the next few years. Meanwhile, the budding markets will bloom at a rate of 6 or 7 percent on average. Based on these figures, the global economy should blossom by 4.5% or so per year.
As we noted earlier, the stock markets of the world will fare far better on average than the real economy. If the U.S. market grows by 15%, then a benchmark of budding markets should reach the ballpark of 40%.
Looking further ahead, the American bourse will lose a lot of zip in the subsequent years. As an example, the S&P 500 index could rise by just 10% or so per year on average during the stretch from 2012 to 2015.
As a result, the markets elsewhere will also lose some of their mojo. Despite the slowdown on the bourse, however, the real economy should continue to trundle along at a measured pace.
The outlook for the stock markets in 2012 happens to be closer to their performance in 2010 rather than 2011. Although the rate of growth will decline slightly, the nimble investor in the global marketplace can look forward to healthy gains even so.
Roundup of Forecasts
On the whole, the global economy is poised to expand by 4.5% or so over the course of 2011. The same is true of the pace of growth for much of this decade.
As usual, however, the headway will vary greatly from one locale to another. Mature economies such as the U.S. will expand by only a couple of percent per annum after adjusting for inflation.
Moreover, roughly 1% of the increase will be due to a buildup of the population; namely, the net influx of immigration over emigration. As a result, the rate of productivity will creep upward by a mere 1% or so a year. The same is true for the average level of income.
By contrast, the spearheads in the emerging regions will streak ahead at an exhilarating clip. In places such as China and India, the pace of economic growth should hover around 9% or more per year.
Meanwhile, the exporters to the sprouting countries will fare somewhere in between the two extremes of growth. An example is found in Australia or Canada as exporters of raw materials. Another sample is Germany or Korea as suppliers of capital equipment or finished goods.
On the bright side, the winds of fortune smile upon the bourses of the world. During the run-up to the Presidential race in the U.S., the government will whip up a storm of sound and fury in a bid to liven up the economy.
For the most part, the whirlwind of huffing and puffing will have scant impact over the long range. Even so, any dumpage of money by way of fiscal programs or monetary moves will nudge up the volume of commercial transactions. As a result, the surge of spending will be a tonic for the stock market, at least over the short run.
Given this background, the U.S. bourse is slated to surge by 15% or so in 2011. Since the American market is a beacon for the rest of the world, the upswing will help to lift up the bourses in far-flung countries as well.
Recap of Global Markets
By the end of 2010, the sprightly countries round the world recouped the losses they suffered from the financial fiasco of 2008 and the global recession in its wake. In each of the vanguards, the stock market as well as the real economy were pushing against the peaks reached prior to the worldwide wipeout.
In the absence of any big surprises, the markets across the planet are destined to surge ahead in 2011 along the lines described above. Moreover, the outlook for the years to follow is a tad less sparkling but still cheery even so.
References
Central Intelligence Agency. “Country Comparison: Population Growth Rate.” https://www.cia.gov/library/publications/the-world-factbook/rankorder/2002rank.html?countryName=United%20States&countryCode=us®ionCode=na&rank=121#us – tapped 2012/1/10.
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Gurría, A., and P. C. Padoan. “Economic Outlook No. 88.” 2010/11/18. http://www.oecd.org/dataoecd/41/33/35755962.pdf – tapped 2011/1/1.
International Monetary Fund. “Gross Domestic Product (GDP) Volume.” Database query at IMF. http://imfstatext.imf.org/WBOS-query/viewhtml.aspx?QueryId=5921&QueryType=View&Lang=en&Lang=en&vh=0000&vf=0&l&il=blank&vcq=1001 – tapped 2011/1/1.
Numbeo. “Property Investment Index for 2010.” http://www.numbeo.com/property-investment/rankings.jsp – tapped 2011/1/2.
Xydias, A., and W. Kisling. “The Stock Rally May Still Have Legs in 2011.” 2010/12/29. http://www.businessweek.com/magazine/content/11_02/b4210042426222.htm?chan=magazine+channel_news+-+markets+%2B+finance – tapped 2011/1/21.
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