(EDITOR'S NOTE: To help advisors efficiently plan for their clients and themselves in the New Year, the editors of AdvisorOne.com, Investment Advisor and Research magazines have canvassed some of the best individual minds and institutional thinking to deliver Outlook 2011, an online series from the end of December through Jan. 7.)

LPL Financial Research expects range-bound markets to provide modest rates of return in 2011 as the job market stages a comeback and the Federal Reserve’s stimulus plan causes the U.S. economy to rise then fall later in the year.

Calling themselves “neither bulls nor bears in 2011,” the authors of LPL Financial Research’s “Outlook 2011: A Mix of Clouds and Sun” also expect that investors will play it safe next year and currencies will influence returns. LPL Financial Corp., the largest independent broker/dealer in the United States, is based in Boston; Charlotte N.C.; and San Diego.

"Bound by economic and fiscal forces that will restrain growth, but not reverse it, we believe the markets will provide modest single-digit rates of return,” the LPL authors wrote. “Overall, 2011 will continue the economic and market volatility of 2010. The global economy remains out of balance, teetering back and forth between the soft spots that invoke a need for increasingly extended policy support and the growth spurts that provoke a desire to begin to pull back some of the record-breaking stimulus.”

What this means for investors in 2011, LPL’s researchers conclude, is the importance of creating a portfolio strategy that navigates market volatility on a theme of reflation—modestly higher prices thanks to the Fed’s second round of quantitative easing. QE2 will devalue the dollar, so investments that benefit from a declining U.S. currency are key, according to the LPL report’s authors. These include commodities and precious metals, commodity-sensitive equities, emerging market equities and debt, and real estate. Expect Treasuries, on the other hand, to see mixed results, with a negative impact on the dollar and the financials sector.

To be sure, currencies will influence returns. Currency impact on investing will be “pronounced” in 2011 as the currency war that began in 2010 presents both opportunity and risk, the LPL authors write. “We expect a downward, volatile path for the U.S. dollar,” they predict.

The U.S. economy will see a year that is neither boom nor bust, in the range of 2.5% to 3% growth, the LPL researchers say. In 2011, the composition of economic growth may be very similar to 2010, including tepid yet positive

consumer spending, decelerating yet positive business-capital spending, and slowing federal government spending coupled with continued weakness in state and local government.

One definite positive for next year will be post-election job growth, they predict—with some drag on growth due to sluggish consumer spending.

“With the absence of legislative and regulatory uncertainty over the potential for major changes in healthcare costs, taxes and other key factors, job growth may be stronger. As stability returns to the near-term legislative environment, business leaders are more likely to make the commitments to growth, including additional hiring, that drive the economy,” the LPL report says.

Policymakers, meanwhile, will be busy moving QE2 forward.

As 2011 gets underway, the Fed will be in the midst of providing substantial economic stimulus in the billions of dollars after already providing a record-breaking $1.75 trillion in stimulus in 2008 and 2009. “Later in the year, drags on growth will begin to emerge as the impact of the Fed’s stimulative monetary policy begins to fade and there is a gridlock-induced shrinking of the federal budget deficit,” the LPL authors say.

As for the markets, dividends may help support demand for stocks in a range-bound, low-yield environment, according to LPL.

The firm’s “restrained” outlook for stocks is supported by a view of earnings growth limited by sluggish revenue growth, but supported by strong profit margins. In addition, slow domestic demand for U.S.-made goods and services will be offset by faster demand from emerging economies. Valuations are already well below historic averages, but constrained due to lack of demand from foreign and U.S. investors.

Earnings, the most important driver of the stock market, have increased substantially from their recession low point and are now only about 15% below the all-time peak of mid-2007 for S&P 500 companies,” the LPL report authors write. “The consensus of Wall Street analysts believes earnings will return to the prior peak by the end of 2011. We are not as optimistic, but believe earnings will post a solid gain in 2011. Earnings are likely to rise about 10% in 2011, well below their 30% growth rate in 2010.”

See AdvisorOne's Outlook 2011 calendar to find the publishing dates for other categories in the Outlook series.

Read about Manpower’s promising outlook for employment in 2011 at AdvisorOne.com.