The Wall Street Journal took a look at what a group of investors and analysts think could be possible surprises in the market in 2011.
Steady Stock Gains:
Markets melted down in 2008, surged in 2009 and engineered an unexpected and impressive rally during the second half of 2010.
The last thing many investors expect this year is a slow, steady grind higher. But that could very well happen this year. The key reasons: The U.S. economy is showing signs of improvement, though housing and employment woes will keep growth under wraps. Inflation remains tame, so interest rates are unlikely to surge. And U.S. shares aren't at expensive levels, but they're also no longer bargains.
Many cautious investors will return to the stock market in 2011, three years after the market's collapse in 2008, argues market strategist Mike O'Rourke of BTIG LLC in New York. Concern about the health of municipal bonds could drive some investors out of bonds and into stocks, others say.
That all could set the stage for a market that slowly moves higher.
"There is a high likelihood it will be a calm year, and we will grind our way to a low double-digit return amidst low volatility," says Mr. O'Rourke. "It will be a surprise to most if we have low volatility, but I believe there is a very good chance 2011 will play out this way."
Some analysts are growing worried about the stock market's near-term outlook. They're concerned that gains of 22% over the last six months, a still fragile economy and concern about Europe don't bode well for stocks. The Standard & Poor's 500-stock index plunged 8.4% during January 2009 and fell 3.6% in January 2010.
But Jack Ablin, chief investment officer of Harris Private Bank in Chicago, relies on data tracking the trading of institutional and retail investors. These numbers suggest that institutions are becoming more upbeat about stocks and January could be strong.
Interest Rates Rise:
If the U.S. economy slowly improves, volatility drops and stock markets edge higher, the Federal Reserve will be tempted to signal a possible rate hike, perhaps by the latter part of 2011.
Some, such as James Paulsen, chief investment strategist at Wells Capital Management, even predict the economy's improvement will spark the Fed to start raising interest rates by late summer, a dramatic shift from its recent efforts to push rates lower.
That could send short-term interest rates higher, something that would hurt bank shares like Citigroup and Bank of America, which have been rallying in recent months. Bonds also could be hurt in that scenario.
The possibility of higher U.S. interest rates could help the dollar, putting pressure on exporters and keeping a lid on gains for the overall market, another reason to expect a year of unremarkable gains.
Gold and silver prices have surged over the past two years as the dollar and other major currencies have come under pressure and economic problems hounded leading economies. Nervousness about future inflation also has grown.
But if the economy slowly improves in 2011 and the likelihood of a Fed rate hike increases, the dollar will strengthen and gold and silver could tumble, some analysts say. A reason for concern: Precious-metals prices are climbing, analysts say, not because of supply problems. Rather, investor demand has surged.
If the dollar rises, some of these same investors who have become enamored with gold and silver -- many of whom held none of these investments in their portfolios just a year or two ago -- could head for the sidelines. And if the U.S. government ever gets serious about attacking its debt problems, it could prove to be another boost to the greenback and setback for the yellow metal.
The Obama administration "will have its 'Sputnik Moment' on the deficit and debt overhang as they watch the euro come unraveled and worry the sovereign-debt crisis is coming to the U.S. as long-term rates begin to move higher," predicts Gary Evans, a former trader and author of the Global Macro Monitor blog.
The Chinese government is struggling to tame inflation, which is at an annual pace of more than 5%. Some say the government could slam on the brakes, crippling growth.
But Daniel Alpert, managing partner of Westwood Capital, is more optimistic about the outlook for China, a good sign for the global economy. He predicts the "Chinese will prove substantially more adept in reining in their own inflation than people are generally assuming."
He argues that the command economy in China is better able to stem excess capital flows leading to inflation. And if the Fed does begin to raise rates, it will reduce capital flowing into Asia.
Popularity Boost for President Obama
If the economy stabilizes and markets edge higher, President Obama could see a rebound in popularity. "President Obama will rise like a phoenix as he moves to the center and looks unbeatable in 2012," Mr. Evans predicts.
As Americans feel better about the economy and their president, it could encourage them to spend and hire, providing a lift, he says.