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Fisher Investments Analyst Perspective: Six Things Investors Should Expect for the Rest of 2011

So far, 2011’s been a difficult year: Bulls can’t get much traction, and bears are wondering when the big drop will happen—it’s been a choppy, basically flat market so far, where neither big fears like sovereign debt nor big boons like blockbuster earnings are tipping the scale either way.

In my view as a Fisher Investments analyst, the rest of 2011 likely holds more of the same. Here are six things investors should look for the rest of this year:

  1. Investors will be haunted by the ghosts of sovereign debt. My boss Ken Fisher wrote about this in his most recent Forbes column (read “Ghosts Around Every Corner” 7/18/11 here). And I quote: “It feels like there are ghosts around every corner. In 2008 and 2009 we came to fear mortgage debt problems and expected more of them. Debt fears have persisted ever since.” Indeed. Whether it’s US debt default fears, municipal debt fears, PIIGS fears, consumer over-indebtedness or some other debt fear, expect them to persist in the popular media but have a lesser and lesser effect on markets as the bull market goes on. It can be tough to see this but is plainly true—stocks have rallied strongly since March 2009, despite all the debt fears that persisted and morphed in that same period.
  2. Few will realize this isn’t a recovery. A simple, stark truth: We’re no longer in a recovery but an expansion. Nominal GDP—both in the US and the globe—is near or at all-time highs. Reading today’s headlines this seems almost impossible. But it is so. The global economy has recovered from the recession and is in expansion mode.
  3. More Financials underperformance. Based on Fisher Investments research, it’s typical for a sector leading a bear market down to get a quick pop in the initial part of the new bull, but then lag afterward (think Energy in the early 1980s and Tech in the early 2000s). Financials fit this archetype indubitably. They continue to be everyone’s favorite villain, and are likely to continue struggling mightily relative to the rest of the market this year.
  4. A continuation of the first half. I wrote about this back in March (Click here for the full recap.) In a nutshell: I think some investors will remain skittish and unable to shake the yips from the 2008 bear, others will see the last two years’ great run and get too bullish (instead, the market’s treaded water). Pessimism about the global economy will be rampant, with the effects of the Japanese earthquake overwrought (the earthquake effects are already passing, and GDP in many regions is coming in ahead of expectations). Some will panic about inflation (there’s been scant sign of it this year, and likely won’t be for some time to come). Others will fall in love with covered call strategies. And, lastly, many will go overboard on emerging markets investments (which have underperformed so far this year, and yes, inflows into those assets this year have been big overall).
  5. More “can it continue?” earnings chatter. Earnings have been far better than most anyone predicted for a few years running nowSo far, Q2 earnings for this year are simply crushing expectations. Corporations won’t trounce expectations forever, but 2011 is a year where earnings remain strong and ahead of expectations. (More on earnings from Fisher Investments MarketMinder here and here.)
  6. The China and Emerging Markets “hard landing/soft landing” debate will drone on. I don’t believe in “landings” for an economy. It’s a bad economic metaphor (once an economy “lands”, then what?). As I said in March, don’t go overboard with emerging market stocks in your portfolio—sentiment is very high on them right now, which may limit upside potential in the near term. But I think you should expect their economies to continue driving strong corporate earnings and global GDP to new highs. Parts of emerging markets will thrive, some will dive, and some will tread water. But overall their growth probably won’t tank in 2011.

A flattish year in the stock market doesn’t mean it won’t be choppy—ups and downs are common and there won’t be any reprieve. But on balance, I think the rest of 2011 has neither great nor doomsday expectations. By the time we get to December, expect pundits aplenty to ask, “Where to now?” for the markets. They will cite “uncertainty” about 2012— uncertainty about the elections, about earnings, about the global economy. But when were markets ever certain looking into the future?

We’ll deal with 2012 when we get there. For now, steer clear of these common investing misconceptions for the rest of 2011.

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