"At a London client Christmas Pension Fund dinner I traditionally speak at, I found myself dubbing 2011 as the likely year of the USA," wrote O’Neill, tapped by Goldman’s CEO Blankfein this year to lead the firm’s increasingly important asset management business. U.S. "growth is likely to be strong and robust enough to lead to declining unemployment which, if correct, should mean that the worst of the social consequences of the credit crisis should start to ease."
O’Neill concludes: "The U.S. stock market will continue to rise, probably with another 20 percent increase. U.S. bond yields will rise further, although I am not sure that they go to the five percent normal."
The U.S. market is acting as if O’Neill is right. The S&P 500 is up nine of the last ten days and posted its highest close since Sept. 2008 on Monday. The bulk of the gains have come from the second half of the year with the index up 27 percent from its 2010 low in early July. The gains have been accompanied by rising rates and a strong dollar.
"Stay away from Europe," said Michael Block, Chief Equities Strategist at Phoenix Partners Group, who recommends buying U.S. focused retailers like Macys (M), Kohls (KSS). "France is going to be the next shoe to drop and it is going to shock people. This is all about the U.S."
Moody’s said Tuesday that it might slash Portugal’s debt rating as budget cuts won’t be enough to spark growth. If Portugal were to need a bailout, it would be the third EU member to need one this year behind Greece and Ireland.
"2011 is likely to witness a lot more dilemmas surrounding the indebted countries and the structure of EMU," said O’Neill in his note. "I don’t think this is truly a crisis of debt; it is more one of leadership and governance."
Goldman’s asset management business has tripled since the end of 1999 with money under management approaching $900 billion. This is still relatively small compared to other wealth managers, but with regulation clamping down on prop trading, Goldman is focusing on this area as one of its opportunities for growth.
"Lloyd specifically pointed to BlackRock’s $3.4 trillion AUM to show the potential scale that can be achieved in the business and has committed one of the firm’s key senior leaders to the business," said Nomura analyst Glenn Schorr in a note this week, referring to O’Neill.
Later in the O’Neill’s note, the Chairman of Goldman’s asset management said he would be looking to put that $900 billion toward genuine "growth economies" for higher returns next year. Along with the U.S. and his beloved BRICs (Brazil, Russia, India, China), he named Indonesia, Korea, Mexico and Turkey as countries likely to take more share of the global economic pie.
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John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.