Slow-growth forecast lifts investment outlook

MILWAUKEE -- The past few months have proved it's still possible to make money in the stock market.

Whether that trend continues in 2011 is far from certain, though.

While investors face risks galore as the New Year begins, there are signs that an economic recovery is in place, stocks generally are trading at fair prices and the Federal Reserve will stop at nothing to pull the economy forward.

Stir in optimism created by a rally that has seen the Standard & Poor's 500 index return nearly 13 percent for 2010, including a strong rise over the final four months, and investment pros say the pieces are in place for stock market growth this year.

"I would say the cards are in place for some good returns from the market in general," said Sara Walker, senior vice president and investment officer at Associated Wealth Management in Milwaukee. That said, "Any comment I make or that anyone else makes could be turned on its ear in a matter of days."

Bulls and bears have equally compelling cases about where the market is headed.

"The sense is among the bulls on Wall Street that the Fed is on their side, the economy is improving, albeit slowly, and you want to be in the market," said Chris Grant, managing partner at Grant, Koehler & Levin Ltd., an investment firm in Mequon, Wis. "The bearish case is that a lot of this is artificial: You have a government-manipulated market that's going to have a bad ending. You have a housing sector that is not improving," and unemployment is stuck near 10 percent.

"If you balance the two, I think you want to be really cautious," Grant said. "You do have the Fed on your side. The economy is getting a bit better," he added. "But there are all kinds of things to worry about."

Where irrational exuberance once ruled the day, cold-eyed pragmatism seems to have taken hold of the market.

That's not necessarily a bad thing, said Terence Pavlic, president of Pavlic Investment Advisors Inc. in Delafield, Wis.

"A certain level of concern is good," he said. "I just think it's a reasonably normal environment. I think it will be decent for stocks."

"The natural rhythm of the economy is we should be in an expansion for the next couple of years, and the Fed is going to do everything it can to make sure that expansion not only continues, but increases in its pace," Pavlic added.

Growth is likely to be slow, though.

"I don't think there are many people talking about a roaring economy next year, where things come screaming back," Pavlic said.

Investors remain cautious after a near-collapse of financial markets.

"People did get so disgusted," Walker said. "For the first time in my career, I saw significant evidence of people losing almost complete interest in the stock market back in 2008 and 2009.

"People have kind of realized and learned that stocks can and do go down. But they also can and do go up -- and they go up more often than they go down," Walker said.

The S&P 500 index had dipped below 700 in March 2009. It closed 2010 at 1,257.64. The Dow Jones industrial average fell to just above 6,500 in March 2009; it closed out the year Friday at 11,577.51.

Until employment begins coming back, everything else, including the stock market, remains a question.

"What we really need to happen for the economy to fully recover is to start to see some improvement in labor trends," said Ignatius Smetek, president and CEO of Arcataur Capital Management in Milwaukee. "We need more jobs for the economy to get better."

If high unemployment hinders economic growth, stocks will be affected.

"The consumer is a huge source of economic growth," Walker said. "If you start to see them retreating and the confidence waning because unemployment remains so stubbornly high ... I think that's another risk to the overall market outlook."

Consumer spending increased 0.4 percent in November, the U.S. Commerce Department said. That was the fifth straight month spending had increased. The Conference Board reported Tuesday that consumer confidence dropped slightly in December.

"Consumers' assessment of the current state of the economy and labor market remains tepid, and their outlook remains cautious," Lynn Franco, director of the Consumer Research Center at The Conference Board, said in a statement. "All signs continue to suggest that the economic expansion will continue well into 2011, but that the pace of growth will remain moderate."

Consumer spending makes up about two-thirds of the U.S. economy.

In addition to jobs, investors will be watching interest rates closely in 2011.

"Interest rates are a real critical piece to this," Smetek said. "The two extremes are slightly higher interest rates due to an improving economy and much better employment trends vs. the other extreme which is employment trends are as bad -- or worse -- than they are today and interest rates spike up dramatically."

Most people think the likely scenario is somewhere in between, he said.

The Federal Reserve will continue to do its best to keep interest rates low, and there's an adage among investment pros that fighting the Fed is futile.

"There's a pretty good argument that says you don't fight the Fed," Grant said.

Debt levels, in the United States and overseas, will also be hanging over the stock market in the coming year.

"Federal debt levels are going to go higher, not lower," Grant said.

For now, the dollar is the international currency, so nations will buy U.S. debt, he said. "What happens when they don't?"

Federal spending eventually will have to be dealt with.

Still, some may invest in stocks because there is nowhere else to put their money.

"I don't like the opportunities in bonds," Pavlic said. "Money markets are at zero. Where else are you going to go? There is nowhere else to go."

So money will continue to flow into stocks for the next several years, he predicts.