Every year the CIA Investment Committee compiles a mountain of research, taps into its collective experience and wisdom, and develops a financial forecast for the coming year to help guide our income-oriented investment strategy. Here are the important trends that we see for 2012.
1. Euro Zone Crisis – This is the most important global financial issue for 2012. More trouble and disruption in Europe means more obstacles for the US economy. Fortunately, we believe Germany will do what is necessary to prevent a break-up of the 17-member Euro Zone. Why? Self-interest. If the Euro collapses and countries revert to their old national currencies, the German Deutsche mark would skyrocket, creating an enormous headwind for the export-driven German economy.
2. The US Economy – We are ten quarters into a moderate economic recovery. Gross Domestic Product (GDP) growth has averaged 2.4% since the end of the great recession and should continue to do so in 2012. Consumer spending stayed strong through the 2011 holiday shopping season; jobless claims have dropped well under 400,000; interest rates remain at historic lows; manufacturers are expanding, and business spending should remain strong as corporations maintain record amounts of cash on their balance sheets. Based on the above, we expect US GDP to expand a moderate 2.0 to 2.5% in 2012.
3. Stock Market – Look for market weakness in the first half of 2012 followed by an election year rally that could begin as early as mid-year fueled by moderate US economic growth, stability in the European economy, and the expectation that the Presidential election will remove some policy and political uncertainties for investors. In the end, we could see market gains in the low double digits.
4. Sectors – If, as we expect, the first half of 2012 is “challenging,” investors might want to focus on life’s necessities, the products and services represented in the “SHUT” sectors of the market — staples, healthcare, utilities and telecom. Increased sentiment in the back half of the year might justify moving into the cyclical sectors, those categories that do well when the economy is on the upswing – energy, financials and industrials.
5. Small vs. Large – In 2011 we saw large cap stocks finally outperform small and mid cap stocks. Look for this trend to continue as investors continue to seek the yield provided by large cap US and multi-national companies.
6. Market Extremes – Many voices in the financial media claim that market volatility is here to stay and we should get used to wild day-to-day roller coaster rides. But there is no evidence to support that claim. We believe that if the Europeans get a grip on their debt situation, we’ll see less market gyration in 2012.
7. More Downgrades – Watch for major rating agencies like Standard and Poor’s to downgrade a swath of Europe’s sovereign debt.
8. Pain at the Pump – Oil prices have been rising since October while gas prices have slipped about 6% in the same period. That disparity will end in 2012 and we will see gas prices rise in the first quarter of the year.
9. Interest Rates – A moderately expanding US economy could lead to rising interest rates. We could see the 10-year Treasury note rise from the sub 2% level to the 2.5-2.7% range.
10. Housing – The housing industry will continue to bump along a bottom in 2012. Historically low mortgage rates and rising rents might prompt more people to consider buying a home. However, the glut of inventory will keep a lid on prices for at least three more years.
So in the end, what do you do with all of this information? Stick with the bucket approach and income investing. If you are young, cheer market corrections as opportunities to add to your 401k. If you are already in retirement, make sure your investments are balanced to produce a steady income, regardless of the stock market’s fluctuations.