A Recovery In Europe Could Come At The Expense Of U.S. Equities

My base case for 2012 is some sort of range-busting rally that then mostly retraces. If this scenario plays out then I think we would be lucky to finish out 2012 100 SPX points higher, but I think a smaller gain is more like it.

That being said, one idea that I believe many subscribe to is that US equities have benefited because of a lousy backdrop in Europe. The idea is that money that might have otherwise gone into European equities instead went into US equities because as shaky as the US fundamentals are, in my opinion, the fundamentals in Europe are far worse.

If the above is true then it stands to reason that some sort of recovery in Europe, real or perceived, could come at the expense of US equities, meaning that US equities get sold to buy European equities. This would perhaps lead to a reversal of the 2011 result, where the US was in the green by a whisker and much of Europe was down in the low teens, or worse, percent wise.

We lagged by a small amount in 2011 (talking specific numbers makes a blog post a marketing piece subject to a lot of compliance stuff) as foreign mostly lagged domestic. I talk a lot about foreign because we own a lot of foreign because I believe in the long term fundamental outlook for foreign - but in any given year where domestic outperforms then we obviously will lag the benchmark, but over the course of an entire stock market cycle (which is our objective) I have unyielding faith that foreign will continue to be the better hold. We still have domestic exposure in case I turn out to be wrong.