As a turbulent 2010 year comes to a close, many are wondering what’s in store for the economy in 2011. While countless predictions are scattered throughout the market media, Goldman Sachs (GS) recently released its forecast for the U.S. economy in 2011. Given the company’s generally correct forecasts and savvy reputation, we thought we’d share with you what the investment giant predicts for next year.
In short, Goldman Sachs is bullish on the economy in 2011. In terms of the stock market, the company expects the S&P 500 to gain roughly 25% to 1450 by the year’s end, citing strong corporate profits, easy monetary policies, and an improving U.S. economy as the primary drivers.
Goldman also said that U.S. GDP growth will accelerate from 2.5% to 4% by the end of 2012. Despite the positive projection, Goldman’s investment strategy team said that they believe investors will continue to have doubt, and that “the equity investing landscape is hard to decipher.”
The investment bank thinks that strong corporate balance sheets, coupled with low inflation and sustained low interest rates will produce a smooth path for earnings growth. It recommends that its clients move to cyclical-sector investments, overweight technology, energy, and financials in the beginning of 2011.
Regarding investment strategy for the new year, Goldman had a few key ideas. The bank’s global investment team said that one of its “Top Trades for 2011” will be Large Cap Commercial Banks, as it expects the financial sector earnings to rise 24% with the recovery bolstering loan demands and improving credit trends. The company recommends exposure to financials via the KBW Bank Index, which the SPDR KBW Bank Index (KBE) ETF mimics.
One of the most profitable assets in 2010 was commodities, especially with historical runs in the prices of gold and silver. Goldman said that it expects commodities to continue to rally in 2011, underpinned by low interest rates. The bank projects precious metal futures to rise to $1,690/oz. by the end of 2011, peaking at $1,750 in 2012 as interest rates begin to rise.
Goldman’s commodities analysts also project oil futures to rally to $105/barrel in 2011. The firm stated:
Energy is historically the best performing sector when the ISM is above 50, which seems increasingly likely given strong October ISM and our US economists upgrade to their 2011 growth outlook.
Energy is also historically strong in the months of February, March, April, and May.
Another one of Goldman’s “Top Trades for 2011” is to short the U.S. dollar/Chinese yuan exchange rate. The bank argues that low interest rates will keep the dollar low, though China will most likely allow its currency to rise in 2011 as it tries to control growth. The company stated:
Rising external political pressure on the [yuan] from the US and other countries, as well as the threat of escalating trade tensions, exposes China’s dependence on exports. More gradual [yuan] appreciation would help alleviate these tensions.
Goldman strategists expect monetary tightening from China through increased interest rates and reserve requirements sometime in the next three to six months.
While Goldman Sachs’ predictions are not always 100% correct, they are usually pretty darned good, which is reason enough to consider its strategies as we move into the new year.
