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5 Most Likely Market Moves in 2012—Searching for Alpha for January 2012
With the markets mostly flat in 2011 (as shown in our December 2011 and year-end index numbers below), the New Year offers its usual mix of promise, peril and uncertainty. Here is a list of the five most likely scenarios for 2012.
Scenario #1: Politics Over Economics (Again)
As we saw in 2011, the response to crises by governments has affected markets much more than the crises themselves. Even in the face of significant economic problems, a dovish response will likely bring asset price appreciation. Slowdowns in India and China, and the current malaise in Europe, may not necessarily cause declines if the fiscal response is swift, logical and well-coordinated.
Scenario #2: Plenty of Volatility
The discretionary nature of political decisions adds significantly to uncertainty in the capital markets. As a result, I view the recent decline in the VIX as short-lived. Expect to see considerable choppiness in 2012.
Scenario #3: Bonds Out of Favor
As the economy continues to slowly heal, investors will begin to consider inflationary risks over safety of principal. The abysmal yields on most fixed income securities are simply too low to attract further attention. I expect to see money flow to equities, which actually boast a higher yield than bonds, as the year unfolds.
Scenario #4: Stocks Look Okay
Stocks’’ yields are better than bonds’. Earnings per share figures are extremely robust. With balance sheets in great shape, stocks are a good bet for the New Year.
Scenario #5: Weaker Greenback
If the world continues to right itself, the dollar is poised to fall. This scenario is contingent on what happens in Europe, but the USD appears richly valued after the flight to quality buying in the third quarter.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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