[This is a continuation of “10 Bold Predictions for 2011: Part 1”]

6. Individual investors finally start to re-enter U.S. equities in a major way in 2011 as the need to build savings in the face of looming retirements becomes a major consumer concern, and rising savings levels that are getting paltry yields in CDs or bond funds get put back into the market. The market rallies in the first half of 2011, as the third year of a Presidential cycle is usually quite good for stocks and economists start to look ahead to moderate growth in 2012 and 2013. Unfortunately, many late-to-the-game investors discover that the market takes a breather in the second half of 2011.

7. Health care reform starts to take effect, with unexpected positive and negative results. Major programs are modified, but not repealed, even as the Republican Party uses the issue as a political wedge. The signs of a political center emerge after the sharp veer to the right in the GOP during this fall’s elections spooked moderate Republicans. Bipartisan legislation starts to gain traction again as the GOP realizes that a centrist approach is the only chance the party has to take back the White House in 2012. Internecine fighting sets the stage for sharp divisions among Tea Party politicians and traditional corporate interests.

8. Oil prices start to move toward the $100 mark as global demand starts to meet supply. Natural gas prices barely move, increasing demand at multi-fuel power plants that migrate from burning coal. An increasing number of auto and truck makers announce plans to sell natural gas-powered cars.

9. Latin America finally sheds its reputation as a region of only upper and lower classes, and finally gets credit for a fast-growing middle class. This in turn leads to a continued influx of global investment, setting the stage for further market gains in Brazil, Colombia and Chile in 2011. But not after an inflation scare that leads to rate hikes and an early 2011 market pullback. The Mexican crime surge also finally starts to abate. A pick-up in the U.S. economy gives a corollary boost to Mexican importers. But the Mexican government faces a renewed crisis when declining oil revenue forces it to sharply curtail staff at Pemex, the nation’s bloated national oil company. The projected long-term drop in oil output at aging fields leads to a sharp drop in the country’s stock market in 2011 as government economists predict a fiscal crisis for subsequent years.

10. In the final quarter of 2011, the housing market finally springs to life as emboldened home buyers jump in after seeing housing prices start to rise. Housing prices will take a number of years to return to pre-recession levels, and housing starts will also remain below their peak, but still start to trend higher in 2012, 2013 and 2014.

Action to Take –> On balance, these factors are largely positive and should set the stage for moderate gains for equity investors. But after the strong rebound that began in the spring of 2009, investors will need to temper their expectations. Average gains in the 6% to 8% range should be welcomed, especially in the face of tepid fixed income yields.

But any market rally that moves the market’s gains well above that rate should be an excuse for profit-taking. As noted above, tech stocks, airline stocks and housing stocks would all benefit from an improving economy. To the extent the dollar starts to weaken, export-focused multinationals will become the major theme.