By nature, I must say that I am optimistic. Back in the 2008 crisis, I saw tons of buying opportunities. Now that the dust has settled down, I still think that 2011 will be a bullish year. In fact, I think that 2011 will look a lot like 2010; many fluctuations throughout the year with a bullish market at the end of the year. So far, I’ve been right for the first three months ;-). My recent meeting with a portfolio manager reinforced my position. I discussed many topics with him but today I will concentrate on my 5 reasons to be bullish on the market:
Bullish reason #1: Company’s balance sheets are solid
Profits are back to 2008 levels and have you seen how much companies are holding in cash on their balance sheets? We have hit a record for liquidity and money market funds in corporate accounts. This can have a few great impacts in the upcoming months:
– Mergers and acquisitions
– Investing in R&D
– Dividend increases
– Share buybacks
All these factors will have a positive effect on the market (especially dividend increase and share buybacks!). Upon this analysis, I think it’s a great timing for buying small caps (that will benefit from any mergers and acquisitions) or looking for solid dividend payers (that should increase their dividend in 2011).
Bullish reason #2: There is a lot of liquidity in the market (businesses and investors)
Companies are not the only ones keeping their cash in money market funds these days. The amount kept in liquid assets is back to 2007 levels. While the “easy money” (when investors came back massively into the market in 2009) is over, I think that there is enough liquidity on the sidelines to make another push on the stock market. In comparison, the level of money market funds of 2007 is twice of what it was in 2005. Therefore, there is still a lot of money to be invested.
Bullish reason #3: Governments Won’t Quit
Quantitative easing, extraordinary measures, low interest rates; these are all common terms since 2008. Central banks around the world just won’t quit on the economy and countries will do everything they can to inject money into the markets (quantitative easing) while supporting indebted governments (extraordinary measures in Europe for example). Each time we see a government having problems, we have a special announcement. I know such measures can’t become the economic norm over time but for a short period of time, this gives enough air for the market to breath. Also, companies are benefiting from all these measures as well. In the end, we all hope that companies will start up the capitalism motor for good so the governments can earn money through taxes again.
Bullish reason #4: P/E Ratios Look Good
I mentioned this point in several of my latest stock analyses; most dividend stocks are trading under their average P/E ratio. Well this is true for the S&P500 as well. If you look at this graph, you will notice that the average P/E ratio is about 15 and the December 2010 P/E ratio of the S&P 500 is 12.9.
This tells me that there is a lot of room for growth on the US market. On the other hand, I would be a little bit more shy with the Canadian market. While I think it will be a bullish market as well, the TSX seems to be valued correctly with a P/E ratio at 15.5. It will be obviously harder to find great deals on the TSX than with the S&P 500.
Bullish reason #5: Bond Funds Are Melting
Another great sign that we will have a bullish year in 2011 is that bond funds are gradually melting to the profit of equity funds. We currently see a direct correlation of bond funds falling while equity funds are rising. I guess that people are tired of earning low interest rate income while they know that their bond funds will drop in value upon interest rate increases.
Dividends rule, period.
Overall, I think that 2011 will be a good year on the stock market. And I will continue to invest more money into dividend paying stocks. I’ll leave you with this very explicit graph showing that 58% of the MSCI World returns were generated by… DIVIDENDs!