An Investment Strategy for 2011

MILLBURN, N.J. (Stockpickr) -- 2010 has ended, and a fresh page will be turned for the market in 2011. Here are some of my strategic macro thoughts for 2011.

1. Early in 2010, I took a look at trading the mid-term elections, based on S&P 500 performance data dating back to 1950. True to form, 2010 showed early strength in the S&P 500, followed by a mid-year sag and post-election surge. If we look at this historical data for the election cycle once again, we can discern some potential trends and opportunities:

  • The pre-presidential election year (2011 is one) is the strongest in the cycle from a statistical perspective. On average, the S&P 500 gains on a price basis 18.27% in the year before a presidential election.
  • Expect a front-end-loaded year, with the first and second quarters generating most of the outsized gains for the year. Some may attribute this to "Sell in May and Go Away." I see this as no more than a slowing of the strong momentum that occurred in the second half of 2010 as inflationary concerns begin to materialize in the second half of 2011.
  • Related: 2011 Stock Predictions and Outlook

    2. In the past, I have looked at the annual price returns on the S&P 500 since 1950 and compared annual returns with the average historical returns for the period of time.

    This first table shows the absolute annual returns on the S&P 500 from 1950 to 2009, the average of which is 8.71%. Figures in red are years in which the index performed worse than the average annual return. Please note that positive returns can still be in red if those years underperformed.

    This second table shows performance relative to the index's average return of 8.71%. Figures in red are those in which the index underperformed the historical average.

    One way to look at bull and bear markets is not in absolute terms but in relative terms. Thus, I point your attention to the second table. When we have had two consecutive years of black, or outperformance, the markets can be seen in bull market mode. The last such indicator began in 1997, after 1995 and 1996. When we have two consecutive years of red, or underperformance, the markets can be seen in bear market mode. The last such indicator began in 2002, after 2000 and 2001. We remained in bear market mode, according to these relative observations since then.

    That is, until 2010. With the S&P 500 outperforming the historic average in 2009 and 2010, I believe we are poised for another multiyear bull run in the stock market.

    3. My price target for the S&P 500 for 2010 was 1250. The index closed within a few points that. 2011 should be a year in which we can expect earnings expectations of the S&P 500 in the range of $93 to $97 per share. As fixed income becomes increasingly less desirable, I am expecting market multiples to rise to a range of 14 to 15 times earnings. This would put my year-end 2011 target in the range of 1320 on a worst-case basis and 1455 on a best-case basis. On an expected basis, I am going to target a closing price of 1385 for the S&P 500 at the end of 2011.

    4.In the restaurant, food and agriculture sector, which I follow quite closely, my "Need to Feed" theme will continue to play out, but we need to start moving away from the end of the food chain -- the restaurants -- and closer to the beginning of the food chain -- the agricultural and farm aspects of food production.

    5.We have begun to end the unwinding of the biggest bull market in bonds that can be identified in the history of modern investing. This will continue in 2011 and in years to come. If you have to stay in fixed income, I have a couple of suggestions:

  • Keep maturities short -- no longer than seven years. Keep durations even shorter.
  • If you must be in fixed income, look for good convertible bond or convertible preferred stocks. You will get the benefit of fixed-income payments with the potential participation from equity appreciation.
  • I wish you the best of luck for in 2011, which should provide surprises, opportunities and disappointments.

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    -- Written by Scott Rothbort in Millburn, N.J.

    Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site; and, publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.

    Mr. Rothbort is a regular contributor to TheStreet.com's RealMoney Silver website and has frequently appeared as a professional guest on Bloomberg Radio, Bloomberg Television, Fox Business Network, CNBC Television, TheStreet.com TV and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.

    Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.

    Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.

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