Related topics: General Electric, Caterpillar, DuPont, Google, Chevron
Take a good look at the impressive gains that both U.S. and global stock markets posted in 2010, to many investors' pleasant surprise. You don't want to miss the repeat performance in 2011.
The third time's a charm, as the saying goes, and 2011 offers a trio of financial-market milestones. It's the crucial third year of the so-called presidential cycle, the beginning of the third year of the bull market that started in March 2009 -- all 10 bull markets since 1949 have celebrated their third birthdays -- and, in June, the start of the third year of agonizingly slow but still positive U.S. economic growth.
"It's going to be either a good year or a great year," said Sam Stovall, the chief investment strategist at Standard & Poor's Equity Research.
That said, investors should never expect smooth sailing, especially now with so much doubt and disbelief surrounding the economic courses being set in Washington and Europe.
S&P's Global Investment Policy Committee cautioned in a recent report that "the very strong performances that are typically experienced" in U.S. markets during these third years "will likely be moderated by the aging of this bull market and the sluggishness of this economic recovery." The group's latest forecast puts the Standard & Poor's 500 Index ($INX) at 1,315 a year from now, less than 6% higher than its close of 1,244 on Dec. 17.
Before looking in depth at what 2011 could deliver, how did our recommendations for 2010 fare? Solidly. In a bullish year for stock and bond investors overall, most of the picks made in January 2010 stood out. (Read "10 money-making investment ideas for 2010.")
Advice to buy large-cap U.S. stocks with a global footprint paid off. A basic S&P 500 index fund would have done the job, posting an average gain of 13% through Dec. 16, according to fund-tracker Lipper. The index's components earn almost half of their revenues overseas.
Using stock dividends as bond substitutes was a lucrative tactic. For example, equity-income mutual funds, which tend to focus on dividend-paying stocks, averaged a 13.7% gain last year, Lipper reports. Steering away from long-term Treasurys also was on target.
Owning cyclical technology-, energy- and industrial-sector stocks was a good call. The S&P 500 industrials sector was up 23% in 2010 through Dec. 16, with the average industrials-sector mutual fund gaining almost 26%. Meanwhile, the technology sector rose 9%, but many tech-focused mutual funds did much better, up 20% on average for the year. The S&P 500 energy sector rose 14%, in line with the average energy-stock fund.
Two tips you probably could have done without: An emphasis on large-cap stocks, which were steamrolled by small- and midcap rivals, and a bullish call on the U.S. dollar -- its exchange-traded proxy, PowerShares DB US Dollar Index Bullish (UUP), is finishing a highly volatile 2010 basically flat. Still, it beat a bet on the euro.
As signs point to investors taking more risk and moving back into stocks, the tea leaves for 2011 suggest that bulls will have more room to run, especially those in U.S. cyclicals. Plus, while small- and midcap stocks have strong support, large-caps could enjoy a larger share of the spotlight. As always, buyers will have to tread carefully, particularly bond investors.
Against this multihued backdrop, here are 10 ways to position your portfolio through 2011:
1. Vote for the presidential cycle
The presidential cycle is a four-year U.S. stock-market pattern with surprising consistency, regardless of the president or the party in office. Next year is the cycle's crucial third year, following the midterm U.S. elections but before the general elections, which bodes well for the broad market.
Historically, the third year -- particularly its first six months -- has been the cycle's best, with the S&P 500 gaining 17% on average in that year of each president's term since 1945, according to S&P. The top sectors in the third year since 1970 have been cyclical -- chiefly technology, materials, industrials and consumer discretionary.
"We have never had the market decline in the third year since World War II," Stovall said. "The party in power wants to stay in power, so they stoke the engines of the economy in Year 3, which bears fruit by Year 4."
2. Invest in industrials
Economically sensitive companies were the U.S. market's strongest in 2010, and their momentum will likely continue. These businesses shine in the earlier stages of an economic expansion as corporate and infrastructure spending increases.
"The global economy continues to recover, and what leads the world economy are emerging markets and business spending," said David Bianco, the chief U.S. equity strategist at Bank of America Merrill Lynch, who sees the S&P 500 at 1,400 by the end of 2011.
That bodes well for the industrials sector -- including firms involved with construction, engineering, railroads, air freight and logistics, electrical equipment, and machinery. Many U.S. industrial companies are multinational and so benefit from emerging markets' growth.
