For the week beginning Jan. 3, 2011, the markets closed up on Thursday with the Standard & Poor’s 500 Index up 1.29%; the Dow Jones Industrial Average was up 1.03%, the NASDAQ was up 2.15%, and the Russell 2000 was up 0.99%. In our eyes, the year is off to a good start.
On Wednesday, the ADP Jobs Report showed that private-sector payrolls expanded in December with a strong increase of 297,000 jobs, easily beating economists’ expectations. The most important part of this number is that many of the jobs were created in small- to medium-sized businesses. Businesses with 50 to 500 employees created 144,000 jobs and those with less than 50 employees added 117,000 new workers. The Labor Department announced Friday that nonfarm payrolls rose by 103,000 in December as private-sector employers added 113,000 jobs.
We believe the economy is going to see growth in the private sector. Federal Reserve data show bank loans were up 0.7% from July 2010 lows. Overall, bank loans were up 0.3% in the final quarter of 2010, marking the first growth since 2008. Many banks have commented on growing loan pipelines lending further credibility to the positive numbers.
We feel the growth in the banks will be driven by small businesses. While the consumers have increased their spending, we do not expect them to go gangbusters. Large corporations do not go to banks for financing. They use short-term paper or corporate bonds to fund capital expenditures. That leaves small and mid-sized businesses for the banks to focus on. We suspect that means while banks will still require high credit standards, the terms will improve for the small- and mid-size businessman.
Now that the entire portfolio committee has returned from the holidays, we have officially revised our projections for 2011. We believe the S&P 500 will close next year at 1,495, which is 18% growth for 2011. This is based on 15.25 times earnings, which we estimate at $98 for S&P companies. The consensus is for earnings to come in at $96, which we feel is low. Our estimate of $98 is conservative considering the past two year’s earnings. We believe capital expenditures will be up, consumer spending will be up, and that the unemployment rate will move down to between 8% and 8.5%. Increases on gasoline and food, and a flat housing market will be the drags on the economy.
We feel the market will hit an all-time high during 2011, reaching at least 1,565. While it will not close at the high, we feel confident that the market is poised to peak during the year. We also believe earnings will reach an all-time high. The current peak for S&P company earnings is $88.
We all agree that interest rates will rise about 1% throughout the year. Many of our clients are savers, and rising interest rates brings good news to savers and good for certain sectors of the market. We expect to see 10-year Treasury bonds around 4.5% to 5%, which will be good for savers looking to invest for their liquidity needs. Mortgage rates also will likely increase, but will still remain low compared to historic averages. We also believe municipal bonds will be the place to be for fixed-income investments.