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. The last time government spending comprised as much of GDP as it does today (during 1945–1960), the economy went through a period of heightened volatility driven by the swings in policy action.

In 2011, the policy-driven themes of reflation, which is the intentional pursuit of modestly higher prices, and a broader U.S. foreign policy provide investment ideas that can thrive in a year where the performance of the major indexes is likely to be lackluster. Expected volatility, which will remain elevated, may present risks to be side-stepped and opportunities to be taken advantage of. Investors with a more opportunistic profile may benefit from a tactical approach to investing in order to find attractive opportunities when offered and successfully take profits when appropriate. Longer-term strategic investors should consider remaining broadly diversified. —LPL Financial Research’s “Outlook 2011: A Mix of Clouds and Sun”

Click here to view a PDF of the February 2011 economic and financial forecast, and recommended allocations for a balanced portfolio.