Generally speaking, I’m optimistic about 2012. But the list of things that could go wrong is a long one. Right now our model portfolios are fully invested in stocks, under invested in bonds, and overweight in alternative assets like real estate, volatility, and foreign currencies. I’m optimistic because for the moment at least, there is increasing evidence that the economy will continue to recover, and will soon transition from recovery mode to expansion mode. Investors are less pessimistic than they have been since the Lehman Brothers collapse in 2008. Money is beginning to flow out of bond mutual funds, and into equity funds. Consumers are more optimistic, so they’re spending more. Businesses are starting to ease up on their hiring freezes, and they’re starting to put some of their cash to work by investing in expansion.
And yet there is plenty to worry about. Prices for key commodities like oil, copper, and food are squeezing an already badly stretched consumer at a time when he can least afford it. The recent turmoil in Japan and the Middle East have created a disruption of commerce around the globe. Fear of a sovereign debt default by Greece, Ireland, Portugal, or Spain has lessened, but is still with us. China is trying to prevent an overheating economy by raising interest rates, making loans harder to get, and otherwise throttling back on growth enhancement policies. And in America, nothing has been done to address the structural problems of the deficit and debt.
The employment reports that have come out in the last few months are encouraging, but too weak to make a dent in the unemployment rate. What’s becoming more clear now is that the job market has stabilized and employment is growing. The fact that it isn’t growing fast enough to absorb the backlog of unemployed persons is a problem, but we are definitely moving in the right direction.
The housing market continues to struggle. But an interesting thing has been happening with the stocks of the home builders. These stocks bottomed more than 10 months ago, and in fact have risen by about 35% on average since the summer of 2010. In my opinion, this is a sign that the worst may be behind us for the home builders, and for the construction industry in general. There’s always a chance that this could be a false start, and that the stocks of housing-related companies might fall again, but history shows that these stocks are a good leading indicator of the future direction of the housing market.
The question that just won’t go away is, are we going to get the dreaded ‘double dip’ recession? Technically speaking, we can’t get a double dip, because enough time has elapsed since the 2008 recession so that the next one will be independent. But our answer (our guess) is that the recovery is struggling and stumbling a little, but the risk of a new recession in the next 12 months is quite low. We think that there’s less than a 10% chance for a new recession in the next 9 months. It’s much more likely that the recovery will continue, the economy will start to expand, but growth will be slower than expected.
With that in mind, we think 2012 will be a better year for investors than 2011. It’s not time to stop worrying, but it might be time to ease back into the pool again.