A “Multi-Year Bull Market” in 2011

Jeff Applegate, Chief Investment Officer of Morgan Stanley Smith Barney (MSSB), said that MSSB believes the theme in 2011 will be “recovery becomes expansion.”

He gave a quick wrap up of the midterm elections and says the results will have two areas of impact on the economy: 1) the Bush tax cuts will most likely be extended, because raising anyone’s taxes in this time of recovery would not make any sense and 2) the new Congress is more keen on free trade than the previous one, which is always good for markets, he said.

He also pointed to December 1 as being an important upcoming event for the economy–when the Deficit Reduction Commission publishes its report on the best ways the government can go about reducing the deficit.  He believes it will be a “hard-hitting” report, and will focus in on entitlements such as Social Security and the age of retirement.   

Charles Reinhard, a Global Investment Strategist with MSSB, discussed how emerging markets reacted to the global economic crisis.MSSB’s outlook for 2011 shows the global economy growing by 4%, with emerging economies expanding by 6%, and developed countries at a much slower 2%.   

Reinhard highlighted two areas in which emerging markets are taking huge strides–their “middle classes” have been growing and strengthening over the past decade (whereas the middle class in developed countries has been shrinking and weakening), and emerging market equities have outperformed developed market equities for the past decade and are expected to continue to do so. The growing middle class in emerging markets will have huge implications for the global economy, Reinhard emphasized.  As more people start to get a little bit more money, they’re demands will change–they’ll start traveling, eating different foods, and having higher standards of living.

As for the U.S. economy, Reinhard said we are at the forefront of a “multiyear bull market” and says we have been there since 2009.  He said this is not uncommon following a recession; in fact, multiyear bull markets are the norm after recessions and have only not occurred after two recessions: once because of the Cuban Missile Crisis, and again when there was a double-dip recession in the early 1980s (he said we are in the clear from having a double dip recession and are experiencing a slow recovery).   

David Darst, a Chief Investment Strategist with MSSB, laid out “background forces” that are currently affecting the economy.  They are:    

• Quantitative Easing Two, more commonly known as QE2. Darst said there has been a big push back from emerging markets, because QE2 will be a good thing for U.S. job growth.
• Monetary easing going on “like crazy” in the U.S. and is tightening most everywhere else, in places like China, Brazil, and India.
• A “stampede to thrift” in Germany, France, and the U.K.  They are avoiding the “financial swine flu,” as Darst put it, that Greece and Ireland are suffering from.
• Congressional action or gridlock? How will the new Congress take care of such important issues as taxes, healthcare, and immigration?

Darst said that the government helped with many stimulus projects–what the economy needs now is structural reform in five areas:

1. Savings and investment reform
2. More emphasis on educating the public
3. Debt and deficit reform
4. Societal disparity (why has Brazil’s middle class grown enormously and the U.S.’s hasn’t at all?) and generational disparity (who is going to take care of the deficit, the Boomers or their kids?)
5. A strong currency

And lastly, Darst outlined five conclusions that MSSB sees for the global economy in 2011:

1. We’re in a multi-year bull market.
2. Even though it will be a bull market, growth will be relatively flat.
3. Beware of treasury bonds at 2.5% (MSSB is underweight.)
4. The U.S./China relationship is the most important relationship in the world regarding peace and progress.
5. It’s not all over for the U.S. We’re going through a “purging, cleansing, transitional period before the Blackberry generation takes over…with stem-cell research, nano-technology, and alternative energies will take the economy to a whole other level,” concluded Darst.