As the United States continues its slow recovery from the worst recession in the last 100 years, the financial markets in the year 2011 will continue their slow dance with left-footed economists and politicians. Currently, the markets are unpredictable, due in part to a high unemployment rate and very unstable housing market. Turmoil overseas isn’t helping either, with every investor and financier hiding under a bearskin rug to watch the outcomes in North Africa. Looking at the world in a macroeconomic sense, certain trends are likely to continue, but you don’t need an online finance degree to make smart investments. If you simply base your investment strategy on a few key trends, you’re sure to receive positive returns throughout the year.
Trend 1 – Higher Energy Costs
Since the start of the New Year, the price of oil has been hovering around $90 a barrel, translating to an average of $3.15 per gallon for us working people. Unfortunately, things may only get worse in this respect before they get better. The unrest in Egypt could threaten oil supplies as fidgeting investors worry about the Suez Canal and Egypt’s pipelines, and like a lexicographer at a Scrabble game the instability of the Nigerian government complicates the region’s exports. Likewise, environmental concerns are increasing the cost of energy. For instance, China’s rapid growth and insatiable appetite for foreign fossil fuels have caused prices to skyrocket. If all of these factors continue to escalate, the price of oil could reach well beyond $100 per barrel.
While the economy appears to be recovering, the rising energy prices may be signaling the return of inflation. Thus, one of the safer industries to invest in this year will be large integrated oil companies. Companies like Exxon/Mobil and Chevron/Texaco stand to profit handsomely while the price of oil remains high and they retain significant reserves. According to Crude Oil Price, oil prices are only expected to continue to rise in 2011, and these increases will enhance the short-term profits of oil services and refineries as well.
While increasing prices make the oil industry a smart investment, it will be wise to avoid the transportation industry. The higher costs associated with increasing fuel prices will be difficult to pass on to thrifty consumers. With federal incentive programs biting the dust as the enormity of the budget crisis unfolds, consumers are going to be looking for cheaper and cheaper cars in the coming year. This will also translate into higher airfare as federal subsidies fail to balance out the higher cost of keeping planes in the air, not to mention the lower turnout due to the TSA’s PR fiasco. With the bulk of transportation sales going through Craigslist and vacationers keeping out of the hands of groping security guards, car dealerships and airlines are set to be their own best customers.
Trend Number 2 – High Unemployment and Foreclosure Rates
Currently the unemployment rate remains solidly above nine percent and experts aren’t predicting a sudden reversal of this trend. Thus, with nearly 10 percent of the country short on disposable income, the outlook for auto-sales and luxury items in the coming year does not look good. Ford’s 4th-quarter earnings last year showed the automobile industry’s boom was short-lived, perhaps sparked by incentive programs which are now largely absent. In any case, the coming year will smile on those who avoid companies which provide big-ticket items or cater to excess. This means luxury cars, hotels and casinos will take a hit, while supermarkets, bargain retailers, eBay and auto-part companies stand to gain.
Trend Number 3 – Gold
Gold is losing the reputation it once had as a safe haven for investors. After topping an all-time high, it and other precious metals are losing value in the wake of panicked investors. However, as the price of gold recedes and stabilizes the potential for great reward surfaces, demand for the commodity is set to pick up in micro-circuitry due to the increased popularity of smartphones. Robert Lenzner of Forbes Magazine, has reported that John Paulson, a prominent hedge-fund manager who made billions betting against the housing bubble, has also managed a similar feat betting on gold. Paulson’s gold fund was up 35 percent in 2010 and he predicts that gold will outperform over the next five years, making it “the ideal vehicle to hedge against the risk of the dollar.” If this pans out, the coming year is set to provide investors with a golden opportunity.
Trend Number 4 – Healthcare
The statistics are in: America is aging fast and people are working farther into their twilight years than ever before. This is going to mean medical bills, and big ones at that. With the future of Obamacare in question, pharmaceutical, R&D and medical equipment companies stand to make a mint. While a large number of aging Baby Boomers are set to retire in the near future, the negative effect the recession has had on many workers’ retirement plans makes that a relative uncertainty in the coming year, which will be good news for people who invest in the healthcare industry. Clearly investing before the boom in the healthcare industry, no matter whether you choose biotech companies or nursing homes, will pay off big in the near future.
While it seems like the economy is barely beginning to recover, there is money to be made where they invest savvy. Be selective, diversify, choose industries that do well in times of slow growth, and don’t forget to keep some liquidity for sudden opportunities. Above all, remember that this is your money and your future: do your research, diversify, and don’t get over-extended.
Guest contributor Kate Manning a business major who worked under others and as a self-employed entrepreneur. She currently owns and manages her own business in Washington State and is a content contributor to Online Finance Degree.