The Risks Ahead
While the global economy may be giving encouraging signs, investors still need to sort through the risks, which in 2011 could range from potential clashes in Korea or the Middle East, to the repercussions of cotton being at its highest price since the American Civil War.
For instance, one of the running concerns is that U.S. companies won't be able to repeat their earnings performance in 2011 because their extensive cost-cutting measures have run their course. The benefits derived from emerging markets may also run out of steam, with some observers already warning of an emerging market "bubble."
Indeed, given the events of the past few years, many investment managers say they're dealing with more unknowns than they've ever encountered in their entire careers. "With the Great Recession and the tumbling of the stock market, I've never seen anything like this," says David Chalupnik, head of equities for First American Funds and a 26-year investment veteran.
Chalupnik has seen his share of economic slowdowns, but he says the depth of the current decline, and the vexing hole the U.S. economy finds itself in, has left everyone groping for answers. "You have no experience to fall back on," he says. "Everything you believe in and trained on just doesn't help."
The Fed's "quantitative easing" is an example of the uncharted waters investment managers find themselves in. The Fed is hoping to pull levers that will lead to more liquidity, greater risk-taking and, hopefully, the creation of enough momentum to generate job growth. But because it's a brand new initiative, there's been varied speculation on the possible outcomes.
If the Fed's plan to lower interest rates and stimulate borrowing works, it could give the domestic side of corporate ledger sheets a sorely needed boost, observers say. "If quantitative easing helps in any way to spur economic activity, you should start to see companies pick up here in the U.S. that are domestically focused," says Quincy Krosby, chief marketing strategist for Prudential Annuities.
Others are concerned that, apart from its impact on the U.S. economy, the quantitative easing plan could have negative and unintended consequences for other parts of the global economy. Jerry Jordan, manager of the Opportunity Fund, fears that the Fed will end up creating more liquidity in the stock market, leading to a commodity price bubble.
But there's one commodity in particular he's concerned about: food. "Food is a whole different kettle of fish," he says. "When food prices go up, everyone loses except the farmers, and they don't constitute that big a block."
Inflated food prices in 2010 could knock the wind out of economies worldwide because they would come at a time when food supply is struggling to meet demand, he says. Illustrating the point, he noted that China just recently went from being a soybean exporter to an importer.
The emerging markets that have been fueling global growth would be especially hard hit by surging food prices because they are already experiencing inflation of between 4% and 10%, Jordan says. "You'd possibly be facing food riots and government intervention," he says.