What to expect in 2011?

Financial markets scarily "normal" - what can we expect in 2011?

As the first 5 days of January go, so goes January!  As January goes, so goes the year!  That's the theory, anyway.  US stocks gained 1.2% in the first week of the new year, on top of the 6.7% gained last month.  That's a year's return in 6 weeks, which makes us think "too far, too fast."  International markets generally gained in the first week of 2011 (0.1% in China to3.1% in Japan.)  However, Bombay cratered 3.8% on the week.  US investors are net sellers of bond funds and net buyers of stock funds in recent weeks, which could carry US stocks into "over-valued" territory, at least for the short term.  Fortunately, we're not focused on the short term - we're more interested in what might happen over the next 1-5 years because we believe investors with shorter time frames shouldn't be in stocks at all.  Here's what we're considering right now

US employment situation

Every month we ask ourselves, "Is this the month that employers finally start hiring?"  Every month we're disappointed.  In the most recent report, non-farm payrolls gained an anemic 103K jobs.  The unemployment rate fell 0.4% to 9.4% but the change is accounted for by a reduction in the overall size of the labor force.  This is the slowest rate of job creation of any recession in the last 60 years.  To substantially reduce unemployment, the jobs creation rate should be in the range of 300-500K/month.  The only ray of hope: average hours worked continue to rise as employers push overtime to the max.  Eventually, current workers will rebel, leading to increased hiring.  Still, the halcyon days of 3.5% unemployment that prevailed through the end of the Clinton administration, or even the 4.5% rate achieved in early 2007, before the financial system blew up, must seem like ancient history to someone whose 99 weeks of unemployment insurance are about to expire.

Read the entire commentary here.