Richard Bernstein's 11 Predictions For 2011

Former Merrill strategist Richard Bernstein, now of RBA, is very bullish on the U.S. economy in 2011.

U.S. stock markets are the key pick in his 2011 predictions (via Barry Ritholtz). He also expects dollar appreciation, euro survival and a Japanese bull market. Bernstein’s least favourite investment is gold.

For the record, Bernstein’s predictions last year were about 50-50. Right on the dollar, stocks and corporate profits. Wrong on hiring and the midterm elections.

#1 The US dollar continues to appreciate

Despite all the talk about debasing the dollar, the DXY Index has actually risen about 2% so far in 2010.¹ In addition, most investors remain unaware that the dollar troughed in April… 2008! We expect the dollar to continue to appreciate in 2011.

Source: Richard Bernstein Advisors

#2 The US outperforms emerging markets

Although the MSCI Emerging Market Index² has outperformed the S&P 500 so far in 2010 (15.9% vs. 11.9%), the gap is smaller than most investors expected at the beginning of the year. Perhaps more important, the S&P 500 has outperformed the BRIC countries (11.9% vs. 8.7%), which few people predicted. Emerging markets are now leading the world in negative earnings surprises and remain very expensive. We expect the US to outperform the broader emerging markets universe in 2011.

Source: Richard Bernstein Advisors

#3 Stocks outperform bonds

Stocks and bonds have performed quite similarly so far in 2010. The S&P 500's total return stands at 11.9%, compared with the 10.4% total return of the BofA Merrill Lynch 15+ Year US Treasury Index. We expect stocks to outperform bonds in 2011 as the US economy continues to expand and as normal upward pressure on longer-term interest rates becomes more apparent.

Source: Richard Bernstein Advisors

#4 Gold produces a negative return

Gold seems to be in a pure momentum market these days. Momentum markets are exciting, and the media love them, but they have a nasty tendency to fall faster than they rose. The US dollar troughed in 2008, and inflation expectations are not rising in any meaningful way. We think that next year, gold's momentum market is likely to cede the spotlight to more fundamentally-based assets like stocks.

Source: Richard Bernstein Advisors

#5 Longer-term treasury rates rise by more than 150 basis points

Our work suggests that the economy is just beginning to enter the mid-phase of the economic cycle. The early-cycle was notably anemic because early-cycle industries benefited the most from the credit bubble, but investors should remember that there is a cycle. Our quick review of longer-term interest rates suggests that they typically increase during the mid-phase by between 200 and 300 basis points. Even assuming weaker-than-average growth next year, longer-term rates are likely to rise substantially.

(Chart: )

Source: Richard Bernstein Advisors

#6 Energy and materials sectors outperform

If the economy is indeed beginning to enter the mid-phase of the cycle, then energy and materials stocks begin to take leadership positions. We expect both global sectors to outperform in 2011.

Source: Richard Bernstein Advisors

#7 US consumer stocks outperform EM consumer stocks

According to one fund-manager survey we recently saw, the emerging market consumer is the most popular investment theme among emerging-market fund managers. With inflation rising and monetary policies tightening in a growing number of emerging markets, it seems unlikely that this theme will meet expectations. We continue to believe that US employment will be stronger than most investors expect next year, which could produce positive surprises for US consumer stocks.

Source: Richard Bernstein Advisors

#8 Small-caps continue to dominate large-caps around the world

The MSCI AC World Small Cap Index has risen 21.7% so far in 2010, which is more than double the MSCI ACWI's +10.2%. And yet, investors have generally not warmed up to smaller companies. By our calculations, US smaller companies have been outperforming China for nearly three years, have twice the 2011 projected earnings growth of China, and have half the valuation.

Source: Richard Bernstein Advisors

#9 Muni bonds outperform EM non-dollar debt

#10 Japan outperforms China

This is another performance comparison that runs counter to investors' expectations. Japan has outperformed China by more than 800 basis points so far in 2010. With expectations being so high for China and so low for Japan, we expect Japan's outperformance versus China to continue.

Source: Richard Bernstein Advisors

#11 The Euro survives and Europe recovers

BONUS: Check out his predictions from last year

Here's another bullish prognosticator

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