[Click to enlarge charts]
If you had one word to describe global markets in 2011, volatile wouldn’t be a bad effort. All that volatility resulted in generally bad market returns across the globe. The stand out performer in the group above was the Dow Jones with a mere 5.5% return. The consensus at the beginning of 2011 were quite the optimists, predicting returns on average in the low double digits for the S&P500. That turned out to be low double digits too much as the S&P500 finished the year flat.
Easy to throw peanuts from the peanut gallery I know, so what did I say last year? Let’s take a look:
Stockmarket – high profile market pundits are uniformly bullish and this raises a red flag for me straight away. The consensus seems to be in the low double digit range for the S&P500. At the upper end, some are looking for a level of 1450 to 1500 by year end. Yes, we’ll see record earnings in 2011 but we should also be mindful that corporate profit margins are at historical highs and have always reverted to the mean.
Is the US stock market cheap? Depends who you listen to, but regardless of what you hear you should know this, pundits that quote an earnings number and then slap a historical average multiple of say 15 on those earnings to get a level for the S&P500 should be ignored at all costs. This kind of grade school reasoning is not supported by historical market returns. I don’t doubt we could get a 14 handle on the S&P500 sometime in 2011, I would suspect we will have a good market for the first half of the year but run into trouble in the second half. I’m looking for low to mid single digit gains for the year which will be disappointing for most.
So I was relatively pessimistic at the beginning of 2011 but turned out to be slightly optimistic.
Other predictions were as follows:
The US unemployment rate will remain above 9%
Given the above, the Fed will remain at 0% on the fed funds rate for the whole of 2011
US Home prices will hit new lows as measured by the Case-Shiller Home Price index
Other things to think about, the global game of kick the can down the road continues with respect to sovereign debt issues and along with it social unrest, these issues won’t go away in 2011. China, China, China, it is almost impossible to refute that China has a bubble in the property and construction industries. Does that mean it will pop in 2011? Not necessarily, but it is worth considering that whilst China and the US were both trying to reflate their economies in recent years, China is now pushing in the opposite direction to the US with inflation climbing to over 5%. China looks set to slow down but can they manage a soft landing? The history of centrally planned economies suggests that will be a tall order.
Also, it will be worth paying attention to disclosures from Wikileaks. The US Federal government has been completely impotent in holding large banks to account for large scale fraud in recent years. Hopefully Wikileaks can shine some light in that area with their much awaited revelations from Bank of America.
The unemployment rate finally fell below 9% so an F on that one. We know the Fed is now committed to low rates for some time, that was easy prediction to make – A. Home Prices have hit new lows according to Case-Shiller seasonally adjusted numbers, however data is only in for October so you can expect the unadjusted numbers to show new lows through December 2011 – A
The call on China was a good one, we know both property sales volumes and prices fell sharply toward the end of the year in China and the economy is clearly slowing so I think China is in for more pain in 2012 – B.
Wikileaks revelations didn’t materialize – F.
Turning to predictions for 2012:
I’ll start with the usual caveat that I have no strong convictions about any predictions for the coming year and nor does my investment philosophy depend on them playing out.
Stock market – S&P500 earnings are at record highs as are profit margins. That says to me that we are closer to a market top than a bottom. Around August/September last year I saw signs that the US economy was tipping into recession, that view was supported by a call from the ECRI and people I respect enormously such as John Hussman of Hussman Funds. For the time being the US economy seems to have avoided that fate but I suspect the risks are no less severe than they were 3 months ago. In short, I could’t get excited about the long term prospects for the US stock market without a reasonable correction taking the S&P500 below 1000 and preferably below 900. For 2012 though I’m just going to take a stab and say it will be down mid to high single digits.
Whilst the Chinese economy did reasonably well in 2011 and the stock market did poorly, I think 2012 will see a worsening economy but at some point the Shanghai composite will look cheap. A weakening Chinese economy has knock-on effects for Australia. Australian retail already looks weak with a spate of downgrades in recent weeks. Australian recession risks are high in my opinion but with the stock market already at depressed levels at some point a good buying opportunity emerges.
Europe is probably in recession right now and sovereign risks won’t go away in 2012, Japan is at risk of a blow up because of its debt problems. Debt overhang continues to plaque the world as governments have refused to deal with it and have embraced can kicking instead. It all makes for an interesting 2012, hopefully I can add some food for thought for readers.