In 2011, a 10% gain in the S&P, with the index finishing the year at around 1,400, isn't out of the question, Zemsky says.
While small-cap stocks have already mounted a significant rally, Eric Marshall, co-manager of Hodges Small Cap Fund (HDPSX) fund, says smaller companies could benefit from merger-and-acquisition activity, which he expects will be fueled by historically high levels of cash on company balance sheets.
"Larger companies will acquire smaller companies in order to facilitate their own growth because of the lack of organic growth in their revenue base," Hodges says.
Emerging markets continue to lead
Between 1960 and 2000, emerging markets' share of global gross domestic product fluctuated cyclically between 18% and 22%, according to the World Bank. In the past decade, emerging economies have broken out and now account for about one-third of global GDP.
Many of these countries emerged from the recession much more quickly than their developed counterparts. Economists and analysts expect them to continue to outpace developed nations like the United States, which will be held back by its debt.
"It certainly looks like emerging markets -- because of their low levels of household debt (and) their low levels of government debt -- are in a fundamental position to sustain the type of growth that we've seen historically," Gallagher says.
That endorsement doesn't come without risks. In a recent note to clients, Gallagher wrote, "Emerging markets truly appear to finally be emerging. My only concern is the unanimity of investor opinion on the issue." Generally, he says, a consensus in the investment world about a given asset class doesn't bode well for its success.
Gallagher believes that a few issues, primarily the potential of a trade war breaking out between, say, the United States and China over currency manipulation, could derail growth in emerging markets.
There are also concerns that these markets may be a bit overheated and that inflation could pick up, which would force governments to take measures to rein in growth.
In that scenario, stocks would take a hit. But Gallagher believes rising interest rates would only momentarily slow growth in emerging markets.
Gold loses its luster
The biggest investing story in 2010 may have been the allure of precious metals like gold and silver. Year to date, the world's largest gold ETF, SPDR Gold Shares (GLD, news), has returned 26%, while the largest ETF tracking silver, iShares Silver Trust (SLV), has gained a whopping 74%. Debt troubles in Europe and bond buyback programs like the Fed's quantitative easing plan made investors nervous, and they took refuge in the shiny metals.
But, Hviid says, there's no actual value to metals like gold and silver, and there are no cash flows by which to measure the prospects for growth. Therefore, these metals trade on investor psychology -- primarily fear.
"Gold is a fear trade," Hviid says. "If fear is receding, the appetite for gold will naturally subside."
Another flare-up in Europe or an economic slowdown in the United States could spur another gold rush, but if the economies improve, the rally could slow.
Hviid suggests investors take a more broad-based approach and get exposure to different types of commodities, like industrial metals, crops and oil that will benefit from a pickup in global consumption.
This article was reported by Ben Baden for U.S. News & World Report.
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[BRIEFING.COM] The major averages began the new trading week on a slightly lower note with small caps leading the weakness. The Russell 2000 shed 0.3% while the S&P 500 slipped less than a point with six sectors ending in the red.
Equity indices began the day in negative territory with only the Nasdaq (-0.04%) making a very brief appearance in the green. After sliding through the first hour of action, the major averages reversed and spent the remainder of the session climbing off ... More
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