Money Management: 2012 is a tough year to make predictions

By Richard J. Bucenec
Posted: 6:13 pm Tue, January 17, 2012

2011 was a volatile and disappointing year for most investors. Expectations entering 2011 featured a continuation of economic recovery around the world from the Great Recession, despite ongoing deleveraging and residual debt and credit concerns. Debt and credit issues, however, obviously exploded over the past year, particularly in Europe.

The investment landscape was one driven by fear and anxiety and while corporate earnings were up in most places, stock multiples were down, causing equity markets to struggle. So much for the third year of the president’s term being a success in the equity markets.

Making predictions for a new year is always a difficult task, but this year the uncertainty associated with emerging markets growth, upcoming elections, and the European debt situation in particular makes the forecasting exercise especially precarious. Nevertheless, it is with this backdrop that we move forward with some predictions for 2012:

1) The European debt crisis begins to ease, even as Europe experiences a recession.
2) The U.S. economy continues to muddle through yet again.
3) Despite slowing growth, China and India contribute to more than half of the world’s economic growth.
4) U.S. earnings grow modestly, but fail to exceed estimates for the first time since the Great Recession.
5) Treasury rates rise and quality spreads fall.
6) U.S. equities experience a double-digit percentage return as multiples rise modestly for the first time since the Great Recession.
7) U.S. stocks outperform non-U.S. stocks for the third year in a row.
Dividends and buybacks hit a record high.
9) Healthcare and energy outperform utilities and financials.
10) Mortgages should outperform industrial high quality corporate bonds.

On the “what can go right” front, we would list Europe moving toward resolution of its debt crisis, the United States heading towards fiscal responsibility, the emergence of a U.S. manufacturing renaissance, a housing recovery and/or an increase in confidence.

The “what can go wrong” list would include a systemic banking crisis in Europe, a true double-dip recession in the United States and a Middle East flare-up that drives the price of oil to $150. Again, it is very hard year to make predictions in.

In summary, 2012 is likely to feature a slow-growth world that includes a recession in Europe. The United States faces headwinds, but manages to achieve growth of between 2 and 2.5 percent. China and India slow somewhat, but, along with the United States, make-up two-thirds of global GDP growth. The big risk remains that of a financial breakdown in Europe, which would tip the developed world, if not the emerging world, into a recession. Inflation should also continue to move lower.

With that said, we could see the markets move sideways in the near term, but feel stocks are poised to continue their rise into 2012. When it’s all said and done, it is imperative to diversify your assets. Regardless if it’s in municipal bonds, domestic stocks, international stocks, taxable bonds, etc., remember to spread your risk over many asset classes.

Richard J. Bucenec is a vice president for Karpus Investment Management, a local independent, registered investment advisor that manages assets for individuals, corporations, unions, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680; e-mail rich@karpus.com.