Even as you continually assess current events for any impact on your portfolio, you also need to spend time thinking about what events may be on the horizon. And although none of us has a crystal ball, it's important to try to anticipate the direction of economics, sector activity, politics and virtually any other issue that may affect the investment environment.
The list below contains possible scenarios for the next 12 months that could impact your portfolio in a meaningful way. Some, such as the expectation that individual investors will rotate assets back into the stock market, are said with a fairly high degree of conviction, while others, such as a subsiding of violence in Mexico, are simply expressed as potential scenarios.
2) Noting the impressive synergies that Delta (NYSE: DAL) derived from its merger with Northwest (which were only belatedly appreciated by investors), investors start to bid up shares of UAL (NYSE: UAL), which will have the surviving ticker in the newly-renamed United Continental Holdings. Investors take note of the fairly low P/E ratios in the sector, even as it has rebounded sharply in the last 12 months. P/E ratios move +50% higher during the next year, as investor concerns about any new economic weakness start to abate. Airlines are able to raise prices only modestly, but passenger volumes per plane, along with capacity increases, continue to grow, setting the stage for a further rebound in profit gains for the sector into 2011 and 2012.
3) Venture capitalists start to get anxious. With pensions and endowments looking to pull some money out of venture capital funds, venture capital firms seek ways to monetize their holdings. As the IPO market remains in a funk, they seek out large public tech companies to buy out at large discounts to recent financing rounds. This extends the tech M&A frenzy, and these deals help set the stage for further gains in tech stocks in 2011.
4) Britain's financial austerity plans are watered down a bit by Parliament, but still lead to an unexpected shock in the U.K.'s economy in 2011 as unemployment rises, labor strikes ensue and the pound starts to lose its safe-haven status. Major British corporate and real estate assets go up for sale, and newly-injected foreign capital sets the stage for a nice rebound, but not for several years. The weaker British Pound also triggers a surge in tourism, one of the country's few bright spots in 2011.
5) States finally stop bleeding, as heavy cost cuts take effect and revenue finally starts to rise at a modest pace. Several states with high debt-levels reach a crisis point in 2011 as federal stimulus support winds down, but most states start to move back toward a balanced budget. Smaller state governments create a local drag on employment in places like Albany, NY, Madison, WI and Sacramento, CA.
6) Individual investors finally start to re-enter U.S. equities in a major way in 2011 as the need to build savings in the face of looming retirements becomes a major consumer concern, and rising savings levels that are getting paltry yields in CDs or bond funds get put back into the market. The market rallies in the first half of 2011, as the third year of a presidential cycle is usually quite good for stocks and economists start to look ahead to moderate growth in 2012 and 2013.
7) Health care reforms begin to take effect, with unexpected positive and negative results. Major programs are modified, but not repealed, even as the GOP uses the issue as a political wedge. The signs of a political center emerge after a sharp veer to the right by the GOP in this fall's elections spook moderate Republicans. Bipartisan legislation starts to gain traction again as the GOP realizes that a centrist approach is the only chance the party has to take back the White House in 2012.
9) Latin America finally sheds its reputation as a region of only upper and lower classes, and finally gets credit for a fast-growing middle class. This in turn leads to a continued influx of global investment, setting the stage for further market gains in Brazil, Colombia and Chile in 2011. The Mexican crime surge finally starts to abate with increased help from foreign governments. A pick-up in the U.S. economy gives a corollary boost to Mexican importers. But the Mexican government faces a renewed crisis when declining oil revenue forces it to sharply curtail staff at Pemex, the nation's bloated national oil company. The projected long-term drop in oil output at aging fields leads to a sharp drop in the stock market in 2011 as government economists predict a fiscal crisis for subsequent years.
10) In the final quarter of 2011, the housing market finally springs to life as emboldened home buyers jump in after seeing housing prices start to rise. Housing prices will take a number of years to return to pre-recession levels, and housing starts will also remain below their peak, but still start to trend higher in 2012, 2013 and 2014.
On balance, these factors are largely positive and should set the stage for moderate gains for equity investors. But after the strong rebound from the spring of 2009 to the spring of 2010, investors will need to temper their expectations. Average gains in the +6% to +8% range should be welcomed, especially in the face of tepid fixed income yields. But any market rally that moves the market's gains well above that rate should be a reason to take profits. As noted above, tech stocks, airline stocks and housing stocks would all benefit from an improving economy. To the extent the dollar starts to weaken, export-focused multinationals will also become a major theme.