No surprise here: The markets begin 2011 on a high note, with futures forecasting strong gains for the first day of trading.

Why this should be no surprise: Fund managers who wanted the losers off of their books are sitting with a bit of cash, and it gets put to work the first opportunity.

The Positives: Looking forward into this year, I see no reason why the rally should not continue into the first quarter of 2011. Markets are over bought, but can remain that way — persistently overbought — for quite some time. For understandable reasons, the public has been MIA since the March lows, and may get taunted in if the markets keep rising. Profits are strong, the economy is improving albeit grudgingly, and the 3rd year of a the Presidential cycle tends to put a powerful tailwind behind equities.Companies are sitting on tons of cash, and we should see increased M&A activity and IPOs. I also expect to see additional CapEx spending and even some more hiring along the way.

The Risk Factors: Broad consensus for strong gains always makes me nervous, and that is what we have at present. Sentiment is frothy. Government policies have been key drivers of gains, and everyone now knows that zero percent Fed fund rates are unsustainable. Organic growth is required for a self-sustaining recovery, and there is little of that to be found. Underemployment is a significant headwind, as is the sorry state residential real estate. Banks remain in mediocre financial condition, still under-capitalized and over-leveraged; the bailouts papered over the structural issues, and moral hazard all but guarantees a crisis in the next decade. States and cities are in a financially precarious position, and the GOP may very well force a shut down of government in Q2 when it comes time to raise the debt ceiling.

Summation Overall:  I expect the rally to continue in Q1, at a more modest pace than the 6% monthly gains we saw close out 2010. But risk factors will accumulate as the year goes on.

History teaches us that when markets collapse 50% or more, they have strong snapback rallies that typically last 12-30 months, with the median around 17 months. That ends with a 25% correction, which we have yet to see as we begin the 23rd month following the March 2009 lows . . .

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Category: Markets

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33 Responses to “What I Expect in 2011”

  1. Winston says:

    Mr. Ritholtz,

    I am concerned about the price of oil and refined products. A forecast increase in the price of fuel represents another significant headwind as gasoline increases act like a tax on the average consumer. Price increases attack consumption from many directions simultaneously, factoring into everything we purchase from basics to the discretionary.

    Businesses still complain of price “stickiness” from the last oil peak at $150. Consumers may have adjusted to the uptick in inflation since the peak. However, price increases will have an adverse psychological effect on perceived purchasing power. Another angle to this issue of rising fuel prices is the anticipated call for an increase in ethanol/gasoline mixtures. This will have an immediate effect on food costs.

    There is quite a list of peripheral challenges to company profits if personal consumption is expected to be the driving force.

  2. [...] Barry: What to expect in 2011, the positives and the risk factors.  (TBP) [...]

  3. Your last chart on commodities and this writeup tells me that we should see emerging markets that are going to get into serious buying and bidding mode again for commodities. The economic crisis tempered that a bit but that should come back with a vengeance either this year or next

    I’m glad I have some oil in my port. I’ll be looking to add more soon

    Do you think this will be the year the commodity picture becomes the fad the I-nets were in the late ’90′s?

  4. Oil presents a mixed bag — I see it much less as a one-sided negative than many others do.

    It can be a headwind, but it also reflects growth.

    Oil prices rise when supply is constrained, when the dollar falls, — or when growth driven demand picks up — usually due to economic expansion.

    The latter is what seems to be driving Crude these days: China, India, emerging markets and the US.

    Hence, why I find it more mixed than often portrayed.

  5. mathman says:

    Marc Faber thinks otherwise (not that THAT means anything, either):

  6. wally says:

    “Broad consensus for strong gains always makes me nervous”

    True. But the consensus is a consensus of commentors… I’m not sure everybody has yet voted with their cash.

  7. dead hobo says:

    Barry Ritholtz Says:
    January 3rd, 2011 at 8:33 am

    Oil present a mixed bag

    I agree and disagree with your statements here.

    Agree: Oil is demand driven, ultimately, and a growing world population that wants to live in the modern world will use more of it. Anything that is related to food production will also rise in price with growing demand. The operative word above is “ultimately.”

    Disagree: I suspect the average investor and even the average wall streeter thinks the price of oil is set as the commodity trading texts say … contract buyers, sellers, and speculators battling it out for the best price with the risk of delivery always intruding. In reality, I still believe the price has more to do with demand for oil investments and the price of oil follows this demand more than demand for the physical commodity.

    This being said, nobody knows what the price of oil would be if price actually reflected supply and demand for the actual commodity. But this is the real world and no regulator cares about it. No fixes to the oil pricing mechanism since $150 oil proves this. Only a world being choked by high oil prices might cause regulators to start regulating. However, even if regulators started regulating, oil would eventually cost a very high price within a few short years as demand rose.

    This time around, I’m putting my morality away and am making money off of out of control oil pricing systems. Everyone else is so I will, too. I will just head for the door when it goes horribly parabolic, again. Credit availability will keep oil prices below $150, I suspect. But $110 to $125 is a possibility before it falls to $65 or so for a brief period.

    Oil pricing in relation to the dollar is more myth than reality. It’s more of a sales pitch that has evolved into something ‘everyone knows.’ If the dollar falls 5%, oil will often rise far more than 5%.

    This run up in oil prices is chiefly a reflection of the demand for oil investments that are based on the price of oil. The actual price of oil is affected by these derivative investments just as it is by text book oil trading … maybe more. Analyzing the price of oil using fundamental supply and demand for the actual commodity is a sucker bet.

  8. wally says:

    “Oil prices rise when supply is constrained”

    How amazing that every single commodity except cocoa and rough rice are now supply constrained.

  9. “Price Composition is multi-factorial”


    you don’t say !? (:


    BR: I didn’t — you did !

  10. dead hobo says:

    Mark E Hoffer Says:
    January 3rd, 2011 at 9:09 am

    “Price Composition is multi-factorial”

    Ha Ha, good one.

    Commodity pricing for hot commodities:

    1/4 supply and demand for actual commodity

    1/10 value of dollar

    balance: Hot money chasing derivatives that are claimed to follow, but actually set via arbitrage, the price of the commodity.

    unquantifiable factor: Actual demand expected to rise over time and eventually stress supply. Sell siders imply this will happen tomorrow. In reality it will take years.

    What to do: Jump in, make a few fast bucks, jump out when prices begin to drop quick like a bunny. It’s going to happen whether anyone likes it or not so make some money and buy something nice for yourself.

    On a side note: I’m about 90% in now. It’s still a buy and hold market assuming you don’t plan to hold forever. The 25%, more or less, drop will probably happen but the market will still end up for the year assuming you don’t buy near the top of the market. If the economy continues to improve, I think the drop will be around August – September.

  11. dead hobo says:

    Last post:

    Re buy and hold:

    The next major crash will probably happen when the US debt crisis comes to the forefront in 5 or 10 years (closer to 5 than 10). S&P 700 or lower will probably be revisited. Until then, an actively managed mutual fund in a market neutral class (not a specialty fund) will probably be a good pick. Only suckers and hobby range traders stock pick for themselves.

  12. b_thunder says:

    “Markets are over bought, but can remain that way — persistently overbought — for quite some time. ”
    “…the public has been MIA since the March lows, and may get taunted in if the markets keep rising… ”

    … and I begin to wonder if Mr. Rithotz still does the writing, or perhaps some parts of this blog have been outsourced to Cramer and Altucher?

    The public, or to be more precise a large portion of income earners that do not fall into the top 10%, has been missing, and will not return to stock market for the following reasons:
    1) the majority of the bottom 50-60% simply live paycheck to paycheck. they ain’t got the spare cash to blow in places like Vegas, Atlantic City, or Wall street. yes, they can cut expenses and make an effort to save more, but they’re true Americans and will spend every penny.
    2) those who do have a few grand a year to invest (incomes between bottom 60% and 90%) are generally smart(er) and more educated, so they pay down credit card and mortgage debt, and create a “reserve fund.” They’ve lost close to 50% twice in the stocks, and 30%+ in RE in 8 year period. Three strikes – and Wall St is OUT!
    3) the Boomers and retirees – they’re will be pulling more from the market than puttng in

    No amount of “taunting” will make me buy AAPL, NFLX or AMZN. Or C, BAC, GS, and AIG.

  13. crunched says:

    ‘…futures forecasting strong gains for the first day of trading.’

    It never stops. May as well just hang a sign up in the pre-market with an arrow pointing up that says – ‘Sheep this way.’

  14. machinehead says:

    LOL, wally! The CCI (Continuous Commodity Index) has blown through its July 2008 record high and just keeps on rising. This is a LATE CYCLE phenomenon — it is NOT good news. (In fact, at the 2008 commodity peak, a recession already was underway.)

    Also not mentioned among the negatives is the sharp rise in interest rates over the past few months. Rising interest rates; rising crude oil; rising gold; frothy sentiment — add it all up, it’s a toxic cocktail.

    So I’m gonna come out and say it — this is a SUCKERS RALLY.

  15. crunched says:

    The bulltards on ‘Fast Money’ are wetting their pants right now. Tim Seymour will be an amped up, sweaty freakshow tonight as he spouts out a barrage of useless, indiscernible statistics to support the rally today. Just wait.

  16. MacroEconomist says:

    I predict the market to be up 6% per month for the rest of the year, with no pullbacks.

  17. crunched says:


  18. cognos says:

    Wierd comments…

    Commodity prices ARE NOT high. They are low. Oil is down 35% since peaking 2.5 years ago. Even if it gained another 50% over the next 2.5 years… it would simply be FLAT on 5yrs.

    The overall commodity indices are down about 30% from the peak.

    The overall commodity indices are up about 2% annually since 1996 (thats 15-yrs at 2% annual… how is this a concern or story?),

    Commodities tend to have large boom – bust cycles… but go nowhere over the long-term.

  19. Long term says:

    “Looking forward into this year, I see no reason why the rally should not continue into the first quarter of 2011. Markets are over bought, but can remain that way — persistently overbought — for quite some time. For understandable reasons, the public has been MIA since the March lows, and may get taunted in if the markets keep rising.” -BR

    agree with this and it is WHEN the public starts buying that the rally’s days are numbered.

  20. * A cousin asked where I trade online because he wants to become a more active trader (he has no exp in the industry).

    * An uncle that was nearly wiped out during the dotcom era argued that he was finally going to jump back in and buy some Apple this week.

    * Father in Law is back to watching Cramer nightly.

    It’s all anecdotal, but did anyone have a similar experience over the holidays at family gatherings? Is main street coming back to Wall street and if so, should I be heading for the exits?

  21. Mike in Nola says:

    Everything is so… bubblicious.

    Everything really depends on the Chinese bubble which that government will do all in its power to keep from deflating. Saw this morning that it will be only two happy to by Spanish debt, not because it thinks they are worth anything, but that’s the easiest way to keep the Yuan from rising against the Euro, thus making it harder to sell stuff to Europe. And, they can probably count on Jean Claude to protect their investment.

    Apple still has another hurrah or two before margin compression from Android and other competition starts reducing its multiple. VZW will launch the iPhone to all the fanfare P.T. Jobs can get the hypnotized media to carry. If VZW hasn’t forced Apple to redo the iPhone, buyers will soon discover that it is not ATT’s network that is to blame for dropped calls, but the iPhone itself, as those who have switched to other phones on ATT have discovered.

  22. PDS says:

    uuumm BR…could you clarify a huge disconnect that you have created here?….wasn’t it just yesterday you posted in “Guru Time of the Year” that “history teaches us its best to ignore them” gurus…!!!! but here you are today playing guru with a posting entitled “What to expect in 2011″ (it even shows on Business Insider where I know you have to create the post as I’m a contributor there)…doesn’t that make you a guru whose advice you told us to ignore ….so according to your own criteria which one of your self described categories to you fit in to?

    1 asset mgr talking ur book?
    2 Perma bull and bear
    3 confirming biased laden analysis

    please clarify this self imposed disconnect for your readers


    BR: 1) This is what I expect. (I have no idea what YOU should expect) Perhaps it would be clearer if i rename this “What I Expect”

    I don’t post at Business Insider — they asked for permission to repost, and i allow them 1 per day — but its supposed to be on a 24 hour delay. I may have to cut them off.

  23. Mooch says:


    When you are a contributor on par with BR, you can have some Blodget flunkie do your posts as well!

  24. machinehead says:

    ‘The overall commodity indices are down about 30% from the peak.’ — cognos

    You need to be more specific. Maybe some heavily oil-weighted index (e.g., the GSCI) remains below its peak. But the more equally weighted CCI (formerly the well-known CRB) broke out to a record high three weeks ago, and hasn’t looked back.

    Wake up and smell the coffee, or drink the cocoa.

  25. PDS says:

    BR..well u wrote it… I didn’t…so I guess it is what u expect….but them…so I guess to be fair you should add

    #4 to your Guru time of the year post…ie What they expect!

    one of your most redeeming personality traits is your ability to be humble….and of course there’s your lack of narcissism…u r truly Master of Your Universe! as your loyal follower ‘Mooch” confirms!

    happy new year!

  26. derekce says:

    I found the Faber link interesting since he is a perma bear and is advising that a correction is a good buying opportunity. He also joins a growing list that likes Japan. Also isn’t oil always supply constrained since OPEC regularly announces that it limits supply and can someone please explain why the World Trade Organization doesn’t take up this unfair trade practice?

  27. DebbieSmith says:

    The price of oil is no longer driven by the American balance between supply and demand. Growing demand from both China and India will be what drives the oil market in the coming decades, especially since both countries rely heavily on imported oil to keep their economies afloat. In the case of India in particular, their oil demand on a per capita level is less than 5 percent of the U.S. per capita demand. Keeping in mind that over 400 million residents of India have no access to electricity at this point, should growing demand for oil result in per capita consumption that approaches that of China (India is now at 42% of China’s per capita demand), they will require an additional 4.4 million BOPD. If that doesn’t put a strain on world oil supply and result in upward pressure on prices, growing demand in China certainly will fill in the gap.


Here is an examination of the supply/demand issues facing India:

  28. dhukka says:

    “History teaches us that when markets collapse 50% or more, they have strong snapback rallies that typically last 12-30 months, with the median around 17 months. That ends with a 25% correction, which we have yet to see as we begin the 23rd month following the March 2009 lows . . .”

    How does the post 2002 rally fit into this statement in the US, as far as I can see the rall lasted 5 years without a 20% correction.


    BR: Nasdaq collapsed 78% — the Dow and S&P much less — look at the Nazz trading patterns . . .

  29. cognos says:

    Machinehead – that is completely incorrect. The CRB is 30% below peak. Only a few commodity are back at peak levels, many are off 30-70%. It’s just bad info.

  30. cognos says:

    The bears here seem to have little grasp of FACTS:

    Wheat -33% off peak
    Corn -18% off peak
    Soybeans -19% off pesk
    Nat Gas -60% off peak
    Steel -23% off peak
    Live Cattle = flat
    Lean hogs = flat since 2008, also flat since 1990
    Cocoas = flat since 2008

    A couple of prices slightly to substantially higher – coffee, sugar, copper.

    These are likely temporary, and most on the long term basis are very moderate ( few % annually since mid 90s or mid 80s spikes).

    We use WAY more oil, steel, coal, corn, soybeans, and cattle… Then we do sugar. They give sugar away for free. At 2x the price Starbuck still GIVES it away!

  31. [...] Why the equity market rally can continue through Q1.  (Big Picture) [...]

  32. [...] very sharp eye on the markets in his blog, The Big Picture, isn’t optimistic. In a size-up of what to expect in 2011, Ritzholtz [...]

  33. [...] see no reason why the rally should not continue into the first quarter of 2011,” Ritholtz writes on his blog. “Markets are over bought, but can remain that way — persistently overbought — for [...]