2011 Analysis: "I think 2011 will feel better than 2010"

By: Lisa Emsbo-Mattingly, Fidelity Investments, Global Asset Allocation Team.

Usually when you exit a recession, you have pent up demand for consumer durables—like cars and washing machines—and housing. This is typically one of the first big drivers of a recovery. Not this time. Housing and autos are both well below their 2007 levels. But I believe there may be a silver lining in this slow recovery: consumer demand, rather than coming back with a bang, may have a longer fuse. So, I think 2011 will feel better than 2010—and certainly better than 2009.

Because incomes drive spending, I believe improvements in the labor market are still critical for the economy. Despite a worse-than-expected November unemployment number, we are getting lots of signs of a continued recovery in the job market. Private sector jobs are growing at a rate not seen since 2007. Weekly initial unemployment claims have declined to early 2008 levels according to the Labor Department. Hours worked in nearly every industry are rising rapidly, according to the Bureau of Labor Statistics. In my view, that indicates a building need to hire more workers.

Finally, one of the biggest drags on the labor market, construction and manufacturing, may finally be stabilizing. Over the past three years, the U.S. economy lost more than 7 million jobs. More than half of those jobs were in construction and manufacturing. Over the past year, the job losses in these sectors have slowed or even stopped. Going forward, the recent rise in pending home sales and the continued strength of manufacturing surveys indicate that jobs losses in the worst hit sectors of the economy may be behind us, and we may even see gains in 2011. As these key sectors normalize, I believe we'll continue to turn the jobs and income picture around.

Rebound ahead in hiring, capital spending

I think companies are beginning to realize they're losing business because they've held off hiring for so long. Now, I believe they actually have to push the button and make those hires.

I think the out-performers in this market are going to be companies that can grow their profits through revenues, because the margin expansion that we saw over the last couple of years is behind us. You're not going to get profit growth from cost cutting anymore. I believe the only way for most companies to get profit growth will be to increase top-line revenue. And I believe to grow top-line revenue, companies will need to hire and invest.

Opportunities from more capital spending and hiring

I anticipate gains in sectors that benefit from this need to hire and invest. Among them: industrial and technology companies, which include everything from truck makers to machinery manufacturers to software developers. Companies that benefit from an improving jobs market – media and telecomm services – also should show good results. Typically at this part of the recovery, some of these sectors are starting to slow. But while we have seen them grow internationally, we're just beginning to see gains domestically.

A higher stock market?

I think that profit growth is going to track gross domestic product (GDP) growth, which is nothing to write home about. But corporate profits are already extremely high; both U.S. total profits and S&P earnings are at or above their 2007 levels. I believe this implies that the market should be trading higher than it is.