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.