2011 was as year full of sound and fury, signifying not much. On one show I called it a Charlie Brown year for markets as repeated promises to hold the football left all of us fairly flat. Generally, I think 2012 will be a modestly better year though not much less volatile. Fortitude, tenacity, and discipline will be the hallmarks of successful investors. In our upcoming quarterly letter, I will review 2011 in greater detail. As 2011 wanes, please know that I am grateful for your support and readership and many comments. For twenty five years, I’ve had the great experience of loving what I do and learning everyday. Thanks to all of you who allow me this privilege. I hope that 2012 is happy, healthy, and profitable for you and yours!
1) US GDP growth will remain modestly positive as the economy benefits from an extension of the payroll tax cuts and various other election year fiscal stimulus measures designed to spur employment and economic growth.
2) At least one rating agency will downgrade US debt. Election year campaign promises will reduce the odds that anything will get done to address the growth in entitlement spending. The rating agencies will respond in kind, but the reaction will be muted as the US remains the only safe haven. Treasury yields will remain very low.
3) US financial markets will continue to be the beneficiary of turmoil in Europe and slowing growth in China and other developing countries. US Treasuries will remain well bid, but the major beneficiary will be high-quality, large cap blue chip US multinationals with strong balance sheets and above-average dividend yields. In a continuation of a trend established over the past few months, blue chips will outperform handily. The “risk-on” trade will be off.
4) Unless there is a disruption in the Middle East, the price of oil will drop below $80 as Europe falls into recession, growth rates in China slow, and the dollar continues to strengthen.
5) The European Union will be held together by a thread as officials continue putting fingers in the dike. There will be an agreement on closer fiscal oversight by a centralized European authority. However, the bazooka of Eurobonds and/or massive ECB buying of sovereign debt will remain elusive. Private holders of Greek bonds will agree to a haircut of greater than 50%. A European Bank will fail.
6) The Fed Funds Rate will remain at .25%.
7) Housing prices will fall slightly but begin the process of bottom building.
8 ) Banking stocks will endure significant volatility but will emerge on sustainable footing by year end.
9) Market volatility will remain torrid as US economic policy, European economic policy, and Middle East foreign policy remain unresolved and uncertain.
10) Occupy Wall Street becomes louder, and the Tea Party becomes more staunchly rooted.