As we approach 2012, there are a number of factors aligning themselves to make the long side of the stock market the most attractive side by far, at least for the start of the year. These are:
- Europe will start 2012 under the influence of the LTRO from ECB. A new operation is scheduled for February, and the impact from the December operation was clearly positive. The same is expected for February. Taking into account that most of the impact happens on the month preceding the operation that bodes well for January;
- The U.S. markets’ valuation seems very reasonable, with large cap tech companies trading at very low valuations, and even the market as a whole looking reasonable, as seen through the Fed model;
- Interest rates are low and likely to stay that way;
- Economic data in the U.S. have been consistently positive and are likely to say that way, with further improvement likely in the housing market, and recent jobless claims also being much better than expected.
These factors seem more than enough to ensure a good start for 2012. Things might change down the road, but right now everything points towards a relief rally, with the LTRO’s impact not yet having been recognized.
Are there any negative factors as well? Actually, an emerging factor might exist: a slowdown on China’s economic growth, prompted by the bursting of the housing bubble there, along with a slowdown on investment. This warrants close monitoring, and if confirmed, might have a strong impact -- especially on commodities and commodity producers.
There are strong reasons to believe in a positive start in the stock market indexes going into 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.