I am starting to concoct a wacky theory about US equities for 2012. A part of how I think markets work is that price performance can deviate from fundamentals and obviously when this occurs there is not necessarily any reason it just happens. Sometimes there is a reason though and usually the reason is more top down.A good example is 2009 where domestic stocks skyrocketed despite what I think were lousy fundamentals at the time. After such a vicious decline in 2008, and into Q1 2009, a big rally was very likely (I said as much in a 2009 outlook piece for Seeking Alpha).
As you know when the big firms are surveyed about what the stock market will do in the new year there is almost always a consensus of up 9-10% no matter what year we are talking about, I am very confident that will be the consensus for 2012 and this consensus is almost always wrong. There have been very few years that the market is up 9%, 2010 was actually pretty close at about 12%. This means that the market then is usually up more than consensus or lags consensus (obvious statement).
My wacky idea for 2012 is that there will be a huge, range busting rally sometime during 2012. I will try to explain this but to be clear this is not a bullish call. I still believe the US market, the economic fundamentals and the current political dynamic make for a very unhealthy cocktail but the market can still go up against that backdrop or as I have said in years past; the market can go up a lot for no reason at all.
I have no expectation that if this turns out to be correct that it will fit neatly into a calendar year. If we get a 25% lift from February to September, take it as I could easily see a huge lift then being mostly given back depending on how quickly it were to happen; the more panicked, the lift the more likely it retraces.
There are several ingredients to why I think I am leaning in this direction (I will clarify my opinion in subsequent posts). In no order of importance I believe the main street distrust of the market is immense and has been now for years. More than four years after the peak and the SPX is still about 20% below where it was in late 2007.
Over the last two years the average return is only 5% which is low. The nature of returns often is that most of the positive return for a multi year period comes from just one year which is important because if I am wrong about a big lift coming sometime in 2012, then there will be some other year that has a very big lift. Support this idea is the possibility that 2009 was more about mean reversion than anything else.
While sentiment is always mixed I think there is more pessimism right now, with good reason, so there is an element contrarianism to this thought as well. I don't think too many people are expecting a meaningful lift if you can believe that opinions from people like Binky Chadha are generally ignored then this might be a good ways from consensus and part of this is built on consensus frequently being wrong.
I will spend some time developing this but I will repeat this is not about being bullish or trying to make a correct prediction. Markets make big moves exactly when they shouldn't. I have no fundamental argument to make for why the market could go up a lot right here but it is important for market participants to always be cognizant of the fact that, like in 2009 and in other past years, the market can go up a lot for no reason. Further, if you can buy into the idea of lumpy returns with a disproportionate amount of a cycle's return come from just a narrow slice of the cycle then missing a 2003 or a 2009 becomes very damaging to long term results.
Maybe one way to think of this is that there is so much going against the market that something has to give in a big, range busting way and in such a manner as to be very shocking even if it only lasts for a short while.
I would hope that if this theory plays out that foreign markets with healthier fundamentals would do a little better than the US but of course better fundamentals does not have to result in better returns for such a short period of time.
The picture is of the Buckey O'Neill statue in front of the Prescott courthouse Friday as we went to Acker Night.
14 comments:
2012 will be a good year for US equities. Not because things are going right here, but because things will be going poorly in the EU for the foreseeable future. Money seeking OECD equities will not have a lot of rocks to look under.
Think about it from the perspective of an investor in the EU (maybe also China, Japan, etc.) doing what you do - looking for a country with better fundamentals than home.
Things only need to continue to marginally improve for that to be the US in 2012.
My prediction, for what it's worth.
Ya gotta trust a guy named Binky, right?
Interesting.
You might be right. Burton Malkiel who is the author or Random Walk Down Wall Street had an opinion piece in the WSJ this past week in which he says investors ought to consider equities instead of bonds as income investments. He reasons that equities have a much better chance for a real return while fixed income might be facing years of negative real return. I can't say that I disagree with his analysis. If this view becomes widely accepted, then the herd mentality could drive up stock prices.
My allocation plan says to invest new money in stocks right now. Hopefully if there is a run up in stock prices an opportunity to rebalance into bonds will present itself.
And don't forget that this is the last year of the President's first term. The administration and Congress have maximum motivation to make this a good year, economically speaking.
This is just the sort of notion that keeps clients invested, and I mean that in a good way. It's also the Boglehead argument, "stay the course" because no one can predict when markets will make big moves. For all we know European stocks could see the greatest gains next year. William Bernstein has demonstrated that countries with the lowest growth rates often generate the best long-term returns.
Roger, just for clarification: do you see a 20%+ run from current levels ahead of us, or do you believe in a drop of the S&P500 down to below 1000 first, with a subsequent run bringing us back to the 1300-1400 level?
Personally, I do expect high volatility in the next 12 months, but also believe we have a margin compression and deflationary phase ahead of us.
Roger,
in the cycles that I follow, I have a high in 2018. But, must bottom first. I have a bottom coming in Jan25, 2012.
Jeff from Milan, Italy
Must clarify. The market will come down from jan 25,2012.
Jeff from Milan, Italy
Jeff,
Good luck with that call. We will be watching!
Do you mean "bottom" (say the Dow) @ down 50 points, down 500 points or down 5,000 points?
Anon 9:18,
What the heck can they do to juice up the economy, seems they have tried about everything under the sun...
lots of comments, I do not expect the next 20% to be down. Something like 5,6,7% maybe but it feels like we are just slogging along at this point. I think it would take a meaningful deterioration from a truly lousy environment now for us to see SPX 1000 or 900. If we were to go to the most recent low (something like 1066) I think we would only stay there for a matter of hours before taking a lot of that back.
I think the range is in tact in the very short term and that the move out of the range will be higher and as mentioned in the post this is not a good news call simply a market mechanics assessment and the faster the lift the more meaningful the retracement.
Anon 11.01,
the market is still in a bottoming process that is trying to dind a botto. We can expect a black swan after jan25, perhaps early feb. Europe does not have a solution yet and I think that like lehman there should be a blowup first for us to bottom. After there should be a build up time. When will that start? Markets usually correct for a time period of 15 years so from 2000 that takes us to 2015. But my feeling is that some sign of building up should come after the european problem; which has not ended yet.
I have taken a buyout from my full time computer job. So now I can concentrate on the market. Hopefully, I wish that luck follows me more than being correct or right. Being right does not put bread on the table.
Best,
Jeff from Milan, Italy
Can you imagine what would happen to our markets if the politicians got together within the next 6 months and announced a $10 trillion cut from the debt over the next 10 years, a 50/50combination of mild drawbacks to entitlements and mild tax increases
no mention of valuations. geez.
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