Investment Basics

There are many reasons for investors to be optimistic about the coming year, particularly when it comes to domestic equities. Although there remains a lot of negative opinion about the state of the economy and, most importantly, the rate of recovery that the economy will enjoy, the reality is that the economy will start to showing very positive signs of strong recovery in the coming year.

Ultimately, there are two things that are weighing on investors' minds when it comes to the current state of the economy. The first is high unemployment. At 9.6% national unemployment, there is no question that this should be a primary focus area for a lot of investors. Without people working, there is no chance that the economy can really get off its feet. Assuming the economy remains at this level, the forecast for next year is that this important rate will drop to 9.1%. Even with such an improvement, the unemployment rate will remain terribly high. Whether it is enough of an improvement to turn the economy around is another matter.

According to information at the Associated Press, unemployment needs GDP growth of roughly 3% so that the unemployment rate stays the same. At GDP growth of 5%, the unemployment rate would start dropping. (As a point of comparison, India's GDP Growth rate was 8.8% at the end of the first quarter of 2010, so we are not aiming too high with a GDP growth rate of 5%; it just seems high given today's growth rate of 2%).

The reality is that US GDP is really only expected to increase to under 3% for 2011. This puts continued stress on unemployment, which is evidently expected to remain high at just above 9% for all of 2011.

However, the other part of problem that many investors and economists see for the US economy is housing. Although many recessionary periods recover with a good and healthy boost to housing starts and other building projects, this did not happen with the latest recovery. With housing starts for 2010 expected to come in at 580,000 adjusted units (well below the 1.65 million starts on average between 2000 and 2008), there needs to be a significant increase to call an end to these housing troubles.

That's where the good news lies. With an expected 880,000 units for 2011, housing starts are expected to increase more than 50%. This may seem impossible given how many fewer people are expected to be heading back to work, but when you consider that consumer spending has been steadily increasing (people want to spend money), the boost to housing may be exactly what is in store.

And with housing returning to what many people believe is a normal sign of recovery, the future should remain particularly attractive for investors in domestic equities. After all, there is already a great deal of convincing data that points to a good recovery for domestic equities, including increased profits, greater durable goods orders for many sectors and the latest ISM manufacturing data showing a good contribution in the way of exports and domestic business investment.

So while some uncertain remains out there, the long term prospect for the economy is actually quite strong.

Chris has more than 17 years of financial services experience. He currently manages a website about Traditional Top Mattresses at QMattresses.com. For people seeking greater comfort, the website also looks at Pillow Top Mattresses as well as more than half a dozen specific brands of mattresses. Drop by the site and see the wealth of information for yourself.