Last week, US markets were little changed during the holiday season. The Dow was virtually unchanged, while the S&P 500 rose 0.1%. For December, the S&P 500 gained 6.5%, while the Dow rose 5.2%.
Plenty of concerns for investors in 2011
Investors have plenty to be worried about, especially for the early part of 2011. According to Investors Intelligence, bullish sentiment was at 58.8% on Dec. 22, the highest level since 2007. This bullishness makes a short-term pullback very likely.
US housing is another area of concern. Last week, the S&P/Case-Shiller Index was shown to have fallen 1% in October. It fell 0.2% more than expected, and was the 5th consecutive monthly fall. Thus, Nouriel Roubini warned last week that the US housing market is now in a double-dip recession.
Euro zone worries also persist. Euro zone nations have to auction about 10% of the 2011 government bonds in January. Investors’ reception to these bonds, and the yield at which they are auctioned, will determine the markets’ direction.
In addition, there is a large possibility that Portugal will follow in Ireland’s footsteps, and become the next country to be bailed out. Portugal has been downgraded by several credit agencies in the past few months, similar to Ireland’s situation before its bailout.
China will also continue to raise interest rates in 2011, in order to slow down its 5.1% inflation rate. With most analysts expecting 3 to 4 interest rate hikes in 2011, commodity prices including oil and copper will take a hit.
Outlook for January
With markets clearly in overbought territory, and bad news likely to emerge from the euro zone or US, I expect a 7% to 15% fall for North American markets in the first quarter of 2011. In fact, this correction could occur as early as January, during the second half of the month.
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