Thread: 10 reasons stocks may fare better in 2012

10 reasons stocks may fare better in 2012

By Adam Shell, USA TODAYUpdated 7m ago

NEW YORK – After an endless stream of negative headlines, the long list of what can go wrong on Wall Street is now well known to hunkered-down investors.

Europe's debt crisis could spin out of control. The global economy could slip back into recession. Election uncertainty in the USA could put risk-taking on hold. Squabbling American politicians could make a gloomy fiscal picture even gloomier.

Financial markets from New York to New Delhi, it seems, are in a perpetual state of doom and gloom. "Risk" has become the new dirty four-letter word on Wall Street — while "opportunity" has virtually disappeared from the investment world's vocabulary.

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That Armageddon mindset raises a question: What could go right in 2012 and spark a stock market resurgence?

"Too many people are convinced the market is in a permanent state of crisis," George Greig, global strategist at William Blair & Company notes in his 2012 investment outlook. "The prevailing conventional wisdom is 'Pro-crisis and cynical equals smart.' Once in that mindset, it is difficult to move quickly or easily to a bullish position."

It's hard to find a lot of people on Wall Street who are wildly bullish. The mood is far more cautious and circumspect than in the late 1990s, when people were quitting their jobs to day-trade stocks with the hope of getting rich.

But while irrational exuberance is a concept linked to a bygone era, an analysis of more than two dozen Wall Street 2012 outlook reports suggests that a slight thaw in the defensive mindset of professional investors may be underway.

How market indexes performed
The Dow Jones industrial average gained 5.5% in 2011.

Standard & Poor's 500 index was flat for the year.

The Nasdaq composite index fell 1.8%.
Despite the risks, there is a sense that nearly four years after the financial crisis began, enough time has elapsed to begin thinking about better days ahead for the U.S. stock market. Such a deep-seated crisis mentality, Greig points out, often creates the conditions needed to pave the way for better long-term returns for stocks.

As odd as it may sound, at the same time there is talk of Europe imploding under the weight of debts it cannot pay back, there is talk on Wall Street about a potential new bull market on the horizon.

Ned Davis Research, for example, says the stock market this year could be headed back close to its 2007 all-time high. If the Standard & Poor's 500-stock index, which ended 2011 at 1257.60, gets back to its peak of 1565.15, that would equate to a gain of 24%.

In the report, Tim Hayes, the firm's chief investment strategist and one of the report's co-authors, suggests that the stock market has "reached the extreme of worry." A cornerstone of the firm's bullish call is their belief that European policymakers will do what is necessary to avoid a replay of the 2008 financial crisis in which the fall of Wall Street investment bank Lehman Bros. spooked markets and caused a severe credit freeze and recession. Hayes also says stocks will get a lift once the "gloom gives way" in Europe and confidence picks up.

Market indicators tracked by Ned Davis Research, says Hayes, are sending the following message: "The world as we know it will survive in 2012, and markets will recover on the receding gloom." His firm says it will turn more aggressive at midyear in anticipation of a presidential election rally — "and possibly the start of a new bull market."

NDR isn't the only firm courageous enough to utter the words "bull market." Citigroup's U.S. equity strategist Tobias Levkovich put out a "Special Report" in mid-December headlined "The Raging Bull Thesis." The report outlines six major developments that, he says, "argue for a new secular bull market beginning within the next 12 to 18 months." Stocks will benefit, he says, from a housing recovery, a renaissance in American manufacturing, better fiscal discipline in Washington, aggressive stock buying by the 35-to-39 age bracket, a move toward energy self-sufficiency and technological innovation.

Bank of America Merrill Lynch technical research analyst Mary Ann Bartels also said that if stocks follow their normal historical pattern of bottoming in years that end in 2, it could launch into a "new cyclical bull market."

The upbeat outlook for the USA is also shared by investment professionals and members of the CFA Institute. In its 2012 Global Markets Sentiment Survey, the U.S. was the only country in the world in which a majority (56%) predicted global stock markets to be top performers. And a quick analysis of the year-end price targets for the S&P 500 from 10 investment firms done by USA TODAY found that they expect the index to finish the year around 1390, or a gain of more than 10%.

Despite all the gloomy headlines, here are 10 reasons stocks could fare better in 2012 than pessimists expect.

1

U.S. is best house on a bad block.

The USA isn't Europe. Or Iraq. Or as bad a place as the doomsayers insist, many Wall Street optimists say.

If it can address its dysfunctional government and deficit problems, "the U.S. will continue to be the 'least bad' place to invest for a number of years," says George Feiger, CEO of Contango Capital Advisors. The USA will benefit from continued innovation, its shale gas resource and its world-class system of raising capital for new business ventures, he says.

Most Wall Street pros also expect the U.S. economy to keep growing, albeit at a sluggish 2% annual rate but fast enough to avoid a recession. In the CFA's survey, only 12% of respondents said they expect the U.S. economy to contract in 2012.

2

A happy ending in Europe is possible.

Despite the fears that a large European country such as Italy will default on its debts, causing a banking crisis there and possible financial contagion around the globe, the eurozone's debt crisis doesn't have to end in a worldwide financial crisis, says Stephen Auth, chief investment officer at Federated Investors.

Auth says the European Union has every intention of "doing whatever it takes" to put the continent back on solid financial footing. Investors can expect several more months of "maybe they will, maybe they won't" fix the problem drama before a successful resolution and bailout package send markets sharply higher, he says.

One major challenge for Europe is trying to shield economies with high debt loads from suffering severe recessions due to growth-choking austerity measures. It is also critical that government bond yields in countries such as Italy not skyrocket to the point that they can't afford to make debt payments or borrow much-needed cash at reasonable rates.

Italy's 10-year bond yield ended 2011 around 7.11%, which economists say is unsustainable. Greece and Portugal, for example, were forced to accept bailouts shortly after their government bond yields topped 7%.

"We won't all talk about Europe quite as much next year as we have in 2011," predicts Jim O'Neill, chairman of Goldman Sachs Asset Management. "Europe will still be called Europe." However, it's important that government bond yields in Europe don't rise out of control.

3

Stocks are priced attractively.

The upside of all the angst about Europe, fears of recession and political gridlock is that stocks are not anywhere near overvalued — they're selling below their historical prices relative to earnings.

The companies in the S&P 500 are trading at 12.2 times 2012's estimated earnings, well below the long-term average of 15.

The drivers of economic activity next year, such as U.S. manufacturing (which has expanded for 26 consecutive months), consumers who are still spending despite the nation's 8.6% unemployment rate, and continued growth from emerging market economies point to further strength next year, says Douglas Coté, chief market strategist at ING.

"We expect 2012 to mark the third consecutive year that fundamentals relentlessly march forward despite heightened global risks," Coté wrote in his 2012 forecast.

4

Corporate earnings outlook still strong.

With holiday retail sales strong, manufacturing posting a decent performance and the housing market showing signs of life, the outlook for corporate profitability remains strong. While profit growth will decelerate to roughly 8% in 2012, vs. nearly 16% growth last year, according to S&P Capital IQ, analysts who track the companies in the S&P 500 expect them to post record earnings per share of almost $107.

Growth is growth, so Wall Street likes the profit picture.

"While we expect uncertainty and volatility to remain high well into 2012, the avoidance of a recession and continued earnings growth" could push the S&P 500 up to 1350, or a gain of more than 7%, Savita Subramanian, head of U.S. equity strategy at Bank of America Merrill Lynch said in a note to clients.

Subramanian noted that Europe's troubles won't have a very large impact on U.S. companies. While her firm forecasts a mild recession in Europe, it estimates that the S&P 500's exposure to Europe is about 14% of sales and 18% of profits.

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5

Election cycle favors gains.

The fourth year of the presidential cycle is the second best for stocks, according to statistics going back to 1900 compiled by Citigroup. The S&P 500 has posted average annual gains of 7.8% in election years.

"The election year," explains Citigroup's Levkovich, "is often a respectable one for stocks because the administration is very focused on trying to stimulate economic growth." This year, however, investors will want to know how the country will deal with its own fiscal problems and how it will trim its $15 trillion deficit but not impede the still-fragile economic recovery.

Many Wall Street pros say legislative gridlock might even be good, as it pushes off major decisions on deficits and tax policy into 2013, after the election.

6

Housing, auto markets in recovery mode.

The bottom might finally be in for two of the hardest-hit sectors during the Great Recession in 2008-2009. Real estate analysts got upbeat news late in the year when housing starts were reported up 9.3% in November, a sign that low prices and super-low interest rates are spurring home buyers to sign contracts. Auto sales surged to an annual rate of 13.6 million in November, the best showing since the financial crisis.

The resurgence of these two key pillars of the U.S. economy bodes well for growth, says Dan Chung, CEO and chief investment officer at Fred Alger Management, which operates the Alger mutual fund family.

"We are not looking for a rocketing housing market, but even a marginal recovery is much less of a headwind and a big boost to economic growth," says Chung. "And it will be an added boost if the auto industry starts to come back."

7

2011 uncertainties wane.

The stock market took investors on a wild ride in 2011. One day, the Dow would plunge 400 points, then surge 400 the next. Much of the volatility was caused by unusual factors, such as the earthquake and tsunami in Japan, unrest in the Middle East, political gridlock in Washington and Europe's debt crisis, says Jeff Kleintop, investment strategist at LPL Financial.

"The memories and impacts of these events," says Kleintop, "have already begun to fade and will continue to do so."

8

History says stocks are poised to rise.

The bull market will enter its fourth year in 2012, and the average gain for the S&P 500 in the six bull markets that lived to see their fourth birthday since World War II was 9.5%, according to statistics compiled by S&P's chief equity strategist Sam Stovall. "And only one of seven bull markets that lived to age three failed to celebrate their fifth birthday," he says.

What's more, following the eight "severe" downturns that cut the market down between 15% and 25% going back to 1945, the S&P was 31.7% higher, on average, a year after the downturns ended, S&P data show.

9

China 'hard-landing' fears overblown.

Fears that China, the driving force behind global growth in recent years, will suffer a slowdown due to weakness in Europe and hurt the global economy, may be overblown, says mutual fund manager Louis Navellier. "China's 'slowdown' is like what happens at the Indianapolis 500 when race cars enter the banked curves. They 'slow' from 225 miles per hour to about 175 mph. I feel China and the rest of Asia will keep growing, almost no matter what happens in Europe."

10

No trend lasts forever.

It's likely the market is not in a permanent state of crisis, and current worries will pass. Then, fear will dissipate and investors will get back to focusing on stock picking and analyzing business fundamentals, not trading based on fear.

"Fear and chaos do not" drive stock prices long term, says Brian Belski, Oppenheimer's chief investment strategist.

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