The winning streak is (almost) up to two. Shall we go for three?
With just a month to go in 2010 (give or take a couple of days), it looks like - barring an end-of-year meltdown - the equity market will post its second straight winning year. But 'tis the season for prognostication; the market pundits are already lining up their forecasts for 2011, and pondering whether stocks can put up another winning year.
Given the wobbly economic recovery and the deep uncertainty on the European debt front, it's no slam-dunk call. But the folks at TD Waterhouse are confident: A three-peat is in the bag.
"While there are significant macroeconomic concerns we should still be cognizant of, we feel stock markets will continue to climb the proverbial wall of worry in 2011 and advance for the third successive year," said Bob Gorman, chief portfolio strategist at TD Waterhouse, in the brokerage firm's annual investment outlook.
"In a tug of war between macroeconomic fears and solid fundamentals, the latter should prevail in 2011."
He predicted that Canada's S&P/TSX composite index will post a "high-single-digit" percentage gain in 2011, about in line with the gains of 2010.
The Canadian market rose 31 per cent in 2009, and is up 10 per cent so far this year. The S&P 500 in the United States was up 23 per cent last year and is up 6 per cent so far this year. Given that December is historically the best-performing month for North American equities, these gains over the first 11 months of the year make it all but certain that the Canadian and U.S. indexes will finish in the black for all of 2010.
Heading into next year, Mr. Gorman said, both Canadian and U.S. stocks still have reasonably attractive valuations, suggesting there is more upside left in the market purely from a price standpoint. He added that "modest" economic growth is the most likely scenario for 2011.
In Canada, two of the biggest market sectors - energy and financials - both look poised to fuel the market growth next year.
"The energy sector, which has lagged in 2010, should do better in 2011, buoyed by a higher average price for oil," the TD Waterhouse report said. "The major banks' shares should do well, based on relatively low current valuations plus prospects of solid earnings and dividend growth in 2011."
In the U.S. equity market, the firm predicted that large-cap stocks will lead the gains in 2011, as investors rotate away from small-cap stocks, which have become relatively more expensive. In particular, TD likes large-cap tech companies, "which have generally exhibited excellent operating results in 2010 but mixed stock market performance."
Among foreign stock markets, the firm favours northern Europe, Japan and emerging markets, predicting high-single-digit percentage advances in all these areas. It foresees low-single-digit gains for the Chinese stock market.
Turning to the Canadian bond market, TD projected that bond yields "will creep up modestly," with returns in the range of 1 to 3 per cent next year. It predicted that high-quality corporate bonds will outperform government paper.
Of course, it's easy to make predictions now - investors' memories are generally sufficiently short that they will have trouble recalling a year from now what Mr. Gorman forecast. But to Mr. Gorman's credit, he doesn't hide behind this - the 2011 outlook helpfully casts its eye back to what he predicted a year ago, to show us just how well he did.
And on many of the big numbers, he did pretty well. He correctly called upper-single-digit returns for both Canadian and U.S. stocks (though the U.S. market is really only lower-upper single digits, and could slip to lower single digits with a bad week or two), and emerging markets have also met expectations for high-single-digit gains. But his fairly bullish calls on European and Japanese equities have fallen short, and his expectation that U.S. large-caps would beat the small-caps didn't pan out.
