Commodities Will Best Stocks in 2011: Poll

NEW YORK ( TheStreet) -- Commodities will beat stocks for the second consecutive year in 2011, according to TheStreet readers.

The outlook for commodities is bullish among the analyst community as well, as fundamentals behind commodities such as crude oil and copper are strong amid a global economic recovery.

>>Commodities That Could Heat Up in 2011

Commodities outpaced stocks, bonds and the dollar to become the top-performing asset class in 2010. Emerging market demand, supply disruptions and a weaker dollar, helped commodities surge across the board, with cotton prices hitting all-time highs and silver and copper at multi-year peaks.

With the U.S. economy set to grow at a faster clip in 2011, commodities could remain in heavy demand. But corporate earnings could also continue to make steady gains, making stocks a good bet as well.

So we asked TheStreet readers whether they would play the economic recovery through commodities or stocks. In a poll conducted last week, an overwhelming 73% of the readers said commodities will beat stocks in 2011.

Pessimism about stock returns could stem from the fact that key benchmark indices are already at their highest levels since before the Lehman Brothers crisis. The Dow Jones Industrial Average and the S&P 500 have been gaining for the past six consecutive weeks.

But the economy is not recovering at a fast enough pace to convince investors that there is significant upside. Despite a string of data that have shown a pickup in manufacturing activity and consumer spending, jobs have continued to disappoint.

On Friday, the Labor Department said the economy added 103,000 jobs in December, missing expectations for a 150,000 net addition. The unemployment rate fell to 9.4%, partly because more people dropped out of the workforce.

A more stable metric of the job market, the employment to population ratio, continues to be well below its prerecession levels at 58.3% and has essentially been flat since the recession officially ended in June 2009.

The sub-par growth in the economy could mean topline growth for companies will stay under pressure, according to analysts. That, in-turn, could place a cap on valuations. "A 3% growth in GDP and a 10% to 15% growth in profits has been priced in," says Jeff Kleintop, market strategist of LPL Financial.

On the flip side, investors are at this point more certain of the outlook for commodities. Weather extremities continue to disrupt supply in commodities such as wheat. Record rains in Australia has delayed the harvest of the crop and reduced its quality, while dry weather in South America might also harm output. That has sent the price of wheat and its competing crop corn surging in the U.S.

Strong demand from a richer middle-class in China, India and Brazil is also cited as an underlying factor that could drive a multi-year rally in commodities.

"There is a better story for commodities out there," Kleintop, told TheStreet last week. "We are finding attractive opportunities across the board. It is a very strong story. Not only does it offer a better risk-reward tradeoff but it is also a good hedge against inflation."

Inflation in the U.S. remains subdued even as India and China battle skyrocketing food prices. Commodity bulls are betting that inflation will spike in the U.S. as the economy grows faster and the Fed continues its loose monetary policy. Others contend that a stronger dollar could keep a check on rising commodity prices.

The debate will likely continue, but for now the scales are tipped in favor of commodities.

-- Written by Shanthi Bharatwaj in New York

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