I don’t believe we can think about what 2012 might hold for us without first reviewing what took place during 2011. It seems we have been caught in a tug of war of sorts between positive and negative forces over the last several months and it is likely that this tug of war is not over and will continue well into 2012.
First let’s look at the positive side. Despite all the negative sentiment out there, it is not all bad news when it comes to the economy and the financial markets. I would consider some of the following as positives to keep in mind:
- The U.S. economy has been fairly resilient and it does not appear that we will slide back into recession.
- We have a very accommodating monetary policy. The Fed is expected to keep interest rates low for a considerable period of time.
- Corporate earnings continue to be very strong.
- Stock valuations appear very attractive by many measures. P/E Ratios are at the low end of their range the last 20 years. Many high quality stocks pay dividends that are higher than long-term Treasury bonds.
- As of this writing in early December, retail sales have been strong during the holiday season.
- Nobody is buying stocks. According to ICI data, investors have pulled money from equity funds for seven straight months. Fund flows tend to be a pretty good contrarian indicator. When everybody is buying stocks they are usually headed for a fall and periods of outflows tend to be indicative of market bottoms.
But don’t get too excited. There are a number of negatives counterbalancing the positives:
- The European debt crisis is far from over. It will almost certainly throw Europe into a recession this year and it poses a severe threat to the banking system.
- The majority of the developed world countries have massive debt issues and an aging demographic problem.
- 2012 is an election year and we already have a massive amount of political discord and uncertainty. The super committee was a total failure.
- Unemployment is expected to stay high. Even though the U.S. economy is growing, we are simply not growing fast enough to create enough net new jobs to solve the problem.
- The Fed, as well as other central banks worldwide, may be running out of options to combat our economic malaise.
Nobody knows for sure how all this will play out. Maintain balance in your portfolios. Stay diversified. Most importantly, stay patient. It may take a while for this tug of war to end.
Damien helps individuals invest and manage risk. He is a CERTIFIED FINANCIAL PLANNER™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.