Nobody knows. But here are some good guesses on matters that matter to investors.
Volatility: When investors are scared, they let emotions run their decisions. Investors are scared. They're worried about Europe, though not sure why, other than it's always in the headlines and always negative. They're worried about jobs, mostly theirs. If they still have one, they're thankful. But most likely someone in their family or one of their friends doesn't. Caution is warranted, in all phases of life. Housing is still a pressing issue. Not much relief seen coming in 2012.
So expect the same amount of volatility, if not more next year as investors still grapple with the real world, then translate that into their investment decisions. They'll be a little more cautious but with the never ending hope that some good news will make the big difference, that the market will turn, start a significant rally, and they won't want to miss it. They'll buy at any hint of positive change, sell on more bad news. Volatility is here to stay as long as high anxiety is the diagnosis.
Interest Rates: They're not going up for a while. Not only do we have the Fed assuring us it's not going to tighten, but demand for money is low. Companies are awash in it. Banks have it coming out their doors and windows. Some of them don't want deposits, will even charge large depositors for taking their money. Interest rates are staying down for the forseeable future which could be all of next year. If you want to borrow (and can qualify), it's a great time to be asking for a loan. The rate will most likely never be lower. Whether it's a mortgage or a business loan, if you meet the lending requirements, you'll borrow at rates once only dreamed of.
The down side is that low rates mean low or no economic growth. That means stocks will have a tough time going up if demand for goods and services stays the same or heads lower. Interest rates simply reflect the cost of money, and it goes up when there's high demand. High demand comes from expansion, either more houses are being sold or more clothes or more cars or more consultations. When businesses need to hire more people or build more plants, they'll need to borrow again. Right now, they have trillions, literally, sitting in their accounts and don't have any need to borrow. They're a good bellwether for gauging economic growth, and economic growth is the fuel that fires any stock market rally.
Jobs: The latest surveys show more businesses are hiring. They also show that many jobs are going unfilled because there aren't enough qualified people to take them. There's a gap developing between what is needed and what people who have worked know. New training will be required to learn the skills for many new jobs. On the other hand, auto manufacturers will be one of the largest employers next year. They're ramping up as customers are coming back to showrooms to buy, not just look. Expect better employment numbers next year as the economy crawls ahead. More jobs mean more spending which means better profits for companies. But first there have to be jobs filled.
Demographics: Next year, 10,000 people a day will retire, if the latest official numbers are correct. Part of retirement is investing. Some of that money will find its way into the stock market, some into the bond market, some into houses. The baby boomers have boomed. Now they're looking for ways to invest, to save, and to enjoy their retirements. The increase in retired investors will help the market but not dramatically.
Housing: It will get better. Unless there are more job cuts and unemployment gets worse. Most of the jobs have been cut to accomodate current demand. People with jobs will most likely keep them.
They've seen housing prices drop and most likely starting to see them level off. With low interest rates, qualified buyers will start to look around to move up or scale down, thinking that what they may lose on their current homes, they will make up in their quality of life or monetarily, when they sell their new home at some point. Home builders have trimmed any excess. The surviving ones have lower inventories, of land and finished homes. Most are only building with signed contracts and large down payments. Expect home builders to show better results. Low interest rates also qualify more buyers.
The stock market: Volatile with an upward bias. No one knows how Europe will finally resolve its problems. But the message has to be fairly clear that spending without revenues isn't an answer. Austerity will be part of any resolution. The sooner that is embraced, the faster the recovery will begin. The U.S. has its own debt laden government, one that needs to face the facts that economics always dictates: lower taxes allow people to spend and businesses to invest in ways that create jobs and foster economic growth. Government also has to stop throwing money at the problems and rein in spending. The deficit has to be cut and in a meaningful way. If the Republicans win in November, expect a large rally, not based on reality, but on the hope that a new approach to the economy will work. Only time will tell. President Obama can only win if the economy is showing positive progress with new jobs and deficit cuts. Time is ticking loudly.
Overall, the stock market faces a lot of uncertainty which creates anxiety which manifests itself in volatility. But if there are more jobs, interest rates stay low, and the economy shows real growth, 2012 could be the beginning of a sustained rally as the usual business cycle begins again.
As always, these are best guesses and how they relate to specific stocks is a matter of interpretation. The large technology leaders like IBM, Intel, Microsoft, Apple, and Oracle should do well no matter what happens as the need for IT has never been greater. Efficiency is paramount for all companies. Health services will benefit from an aging population. Financial institutions, once they know what new regulations are and how they will affect them, may see 2012 as the turning point. If Dodd Frank is eliminated or edited, that will be a major boost to all banks.
Investors can look forward with hope and fear. The smart ones will always have a position in the market, expect the worst and hope for the best, and when the best happens, it happens fast. Major moves sometimes come in a day or two. Staying partially invested, even in highly volatile times, takes courage, but it is rewarded on the days good news breaks and stocks take off.
- Ted Allrich
December 13, 2011