Although stocks didn’t rally until the fourth quarter of this year, that momentum could continue into 2011, according to The Wall Street Journal’s “Heard on the Street” column Wednesday. Thus, the two-year-long aversion to stocks and stock funds could finally be coming to an end.
Improved economic news has boosted both the Stoxx 600 index in Europe and the Standard & Poor’s 500 to more than 11% year-to-date. And investors have followed suit. In the past month, investors have placed $28 billion into equity funds and withdrawn $6 billion from bonds.
With the valuation of stocks so much more appealing than other securities—stocks in the S&P 500 are trading 13 times 2011 earnings—and corporate balance sheets flush with cash, the earnings outlook is positive. Government bonds, on the other hand, face fiscal, deficit and inflation pressures. Even the corporate bond rally seems to have run its course.
Bank of America Merrill Lynch projects the S&P 500 will trade at 15 times earnings by the end of 2011, and RBS expects the Stoxx 60, currently trading at 11.3 times, will rise to a multiple of 12 by year-end 2011.
That doesn’t mean that market volatility will subside. Should the European crisis spread to Spain, that could upset the markets in the euro-zone. Other threats: China’s monetary policy, potential inflation in emerging markets and the failure of U.S. quantitative easing to create jobs.
Yet, while it is likely to be a wild stock market ride in 2011, the odds are that it will be on the upswing.