The stock market is on a roll, according to TD Waterhouse’s 2011 Investment Outlook.

On Monday the firm announced that for the third year in a row it forecasts rising stock markets in 2011 in America and Canada.
“While there are significant macroeconomic concerns we should still be cognizant of, we feel stock markets will continue to climb the proverbial wall of worry in 2011 and advance for the third successive year,” said Bob Gorman, Chief Portfolio Strategist, TD Waterhouse, in a statement. “In a tug of war between macroeconomic fears and solid fundamentals, the latter should prevail in 2011.”

Gorman explained the themes that will dominate the financial markets in 2011:

Fear: The American people fear a double-dip recession, deflation, a continued soft housing market and tepid commercial real estate. While all are legitimate concerns, Gorman said, the worst fears will not come true and will instead be outweighed by modest economic growth of 2-3% in the U.S., which will be enough to boost corporate profits but not enough to ignite inflation and a sharp tightening of monetary policy. Gorman believes U.S. corporate balance sheets are in very good shape and are boosted by record liquidity, which with low price to earnings (P/E) multiples, should support merger and acquisition activity. Meanwhile, following the mid-term election, a new balance of power in Washington should, on balance, make for a more supportive environment from an investment standpoint.

“It is no accident that the third year of the Presidential term has historically generated the highest returns within the four-year Presidential Cycle, a pattern that may re-assert itself in 2011,” the statement said.

Small Cap Stocks are significantly more expensive than large caps, but investors should see a turn around in 2011: “Large-cap tech companies, which have generally exhibited excellent operating results in 2010 but mixed stock market performance, should do well in 2011 as fears of a double-dip recession recede and corporate tech spending increases.” In addition, as credit conditions slowly improve, large-cap financial stocks, which have fallen behind, will improve.

Canadian Equities have reasonable valuations as well in both absolute terms and relative to bonds and are expected to rise for the third successive year. The energy sector, which lagged in 2010, should improve in 2011, as oil prices increase. Major banks' shares should do well, based on relatively low current valuations and prospects of good earnings and dividend growth in 2011.

Canadian Bonds: As fears of deflation and a double-dip recession subside, bond yields will slowly increase. Canadian bond returns will be from 1-3% in 2011. High quality corporate bonds will outperform government bonds, reflecting the higher coupons and shorter duration of corporates, TD Waterhouse predicts.

International Markets: Germany, Switzerland and Great Britain, will continue to be the foreign market plays because of reasonable growth prospects and attractive valuations. P/E multiples are low and dividend yields are high, supporting a high single-digit advance in their equity markets, the firm anticipates. Meanwhile, Japan's stock market will improve in 2011.

Emerging Markets: Inflation will be cause for further monetary tightening in India and China and will dampen these markets in 2011. Meanwhile, China's tightening of credit conditions, following the expansion of credit during late 2008 and early 2009, will put pressure on its real estate sector. “Overall, China, which lagged other emerging markets in 2010, will likely outperform the group in 2011, with a low double-digit return, propelled by solid valuations and earnings growth,” the firm anticipates. “Emerging markets, as an asset class, should record high single-digit returns in 2011.”