Following a year of heightened stock market volatility marked by global political uncertainty, here is my current outlook for the economy and markets in 2012, where more volatility and political uncertainty is expected:
1) Expected continuation of slow, but steady, growth for the U.S. economy - call it an extended "U-shaped" economic recovery.
2) Consumer sentiment continues to rise but then stagnates as we get closer to the presidential election cycle - leading to a lack of substantial consumer spending necessary to build a sustainable economic recovery in the U.S.
3) Consumers, as well as state/local governments and businesses, continue to deleverage while refraining from taking on new debt, which furthers constrains spending growth.
4) Larger companies with strong dividend histories within traditionally defensive sectors (such as Utilities, Health Care and Telecommunications, etc.) should fare well given the expected slow growth environment. Should economic growth exceed expectations (i.e. GDP annualized growth of > 3.0%), depressed cyclical sectors such as Basic Materials and Energy should perform well.
5) Expectation for consistent, but not staggering, earnings growth by U.S. companies, many of whom possess exceptionally strong balance sheets with overall record cash balances now exceeding $2 Billion. Positive earnings surprises, in areas such as Autos where there is pent-up consumer demand, could provide sparks for short-term market rallies.
6) Bond yields, while edging higher, likely to remain at historic lows - at least through the end of the year - perhaps being maintained by intermittent flights to quality spurred by market volatility in addition to the previously telegraphed liquidity intentions of the Federal Reserve.
7) Growth investors may continue to turn to Gold, and perhaps Silver, as an alternative to U.S. Treasuries, for "flights to quality/safe haven" trading opportunities during periods of heightened volatility throughout the year.
8) More noise to come from the European debt markets, potentially leading to a further tightening of the credit markets and concerns over the future of the euro currency.
9) Demographic trends place continued pricing pressures on certain commodity types (examples include agriculture, energy and industrial metals) despite a lackluster economy and elevated prices that exist for specific commodities - which could be offset to a degree by weakened demand/slower growth in China.
10) Real growth takes place away from developed markets in well positioned emerging markets such as Brazil and Colombia in Latin America, Turkey and Egypt in the Middle East and Indonesia and China - yes, China - in Asia.
11) Slight improvements on the jobs front (primarily in a further reduction of initial jobless claims as opposed to a significant reduction in the unemployment rate) and gradual, yet no material, improvements in the real estate market on a national basis.
12) Despite a non-robust economy, an unclear domestic political picture and lingering European debt risks, the stock market can, and should, still do well in 2012 and growth investors can benefit from a well diversified portfolio built to withstand the many fits and starts that are expected throughout the year.
Given the many moving pieces in the complex, global investment puzzle, we believe that investors would be wise to re-visit their asset allocation strategies at the beginning of this year to help ensure that they have the diversification in place to withstand potential periods of heightened volatility as well as the breadth of asset classes and sectors to help deliver risk adjusted growth opportunities.