Related topics: Europe, China, Jim Jubak, economy, stock market
Time to rethink 2011.
The news of the last three weeks from Europe and China -- and the market reaction to that news -- demands that I take another look at my investment strategy for 2011.
It now appears that 2011 is going to be a lot less linear and a lot more volatile, while not necessarily any more or less profitable, than I thought it would be just a few scant weeks ago.
Let me begin by contrasting what I thought then with what I think now, and what the change in my thinking means to my approach to 2011.
From orderly advance . . .
Here's how I saw things a few weeks ago: A slow-growth U.S. economy had entered a temporary slump in the second quarter, growing by just 1.7%. That low growth rate was enough to set off fears of a slip toward even slower growth. We even got talk of a double-dip recession.
Jim Jubak
That slump yielded to a higher 2% growth in the third quarter, but 2% growth is still way below the 2.5% to 3.5% needed to take a serious bite out of unemployment or to reverse a trend that was leading to 0% inflation -- or worse, actual deflation.
All that was enough to force the Federal Reserve to implement another round of monetary stimulus (known as "QE2" for quantitative easing, phase 2 -- and possibly for the program's resemblance to a big ocean liner that can't change direction quickly).
That stimulus would be enough to power a stock market rally, especially when combined with signs early in the fourth quarter of better-than-expected U.S. growth leading to an improvement in consumer spending, which would first show up in improved retail sales. Investors would get a solid, if not spectacular, fourth-quarter rally as fears of a slump yielded to optimism about holiday spending.
The real growth slump would set in during the first half of 2011 as the effects of 2008 monetary stimulus in China and 2009 stimulus in the U.S. faded.
That slump would be worsened by efforts by the European Union to rein in government spending and in China to fight inflation by tightening the money supply.
The U.S. would be almost alone in the world in continuing a program of monetary stimulus -- one designed to lower unemployment rather than reduce the national deficit.
But I expected the U.S. and global economy to pick up in the second half of 2011.
Growth in the world's developed economies wouldn't be red hot, but they would see a pickup of 0.5 percentage points or more of growth in European economies and a gradual push in the U.S. to growth above 2%. Pressure on developing economies would diminish as the supply of hot money from the Federal Reserve's $600 billion QE2 program ended in June.
That would result in fewer interest-rate increases in developing economies as they tried to fight inflation, and that in turn would remove one brake on economic growth in that part of the global economy in the second half of the year.
