1. Bonds will continue to get clobbered. I've written extensively about what's taking place with M2. Money supply growth will be one of the factors behind the destruction of bond values, but the economic rebound taking place will also add pressure to bonds as investors seek out better investment opportunities. Yields on the 30-Year Treasury Bond should easily top 5% before year's end. Unfortunately, many investors will learn that their "flight to safety" wasn't so safe after all.
2. Stocks will continue to recover, but volatility will increase. Volatility in the bond market will make itself felt in stocks. But the trend for growth in corporate profitability remains intact. And a positive yield curve is extremely helpful for growing corporate profits. This is a great set-up for the S&P, if you can stomach the roller coaster ride.
In many ways, this year is reminiscent of 1994/1995. Few remember the bond crash of 1994, but there's a great paper that discusses its aftermath here.
3. The U.S. dollar will firm up against most currencies. Unfortunately, this will be bad news for commodities investors, as a stronger dollar will dampen gains for most raw materials. I might not bet against $100/bbl oil. The markets for crude are always insane, and the same goes for gold. But as a whole, expect commodities to post lacklustre returns for 2011.
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