By David Sterman
We've reached the time of year when investors flip the calendar and try to anticipate the events to come for 2012. I've weighed in with my own near-term strategies and provided a glimpse of my three favorite sectors for the coming year.
Right now, bearish factors such the European crisis, still-high unemployment rates and a pervading sense that Washington can do no right are the key factors behind the market. Indeed, the S&P 500 is down roughly 10% since late July, and it feels even worse than that. Stocks could slump even more - recall that they were quite cheap at the start of 2009 and fell even further for the next two months before posting a stunning two-year rally.
Yet in some respects, a focus on the next few quarters may be obscuring a far larger set of trends that may or may not affect the market in 2012, but will surely dictate the trading action in 2013 and beyond. Simply put, there are a lot more reasons to be bullish on stocks for the long haul then there are reasons to be bearish. The longer-term is brighter than you may think. Here's why ...
1. An Era of Inexpensive Energy
Lost in all of the hand-wringing about the slow-growth economy has been the remarkable turnabout in our nation's energy supply. With each passing month, we're making the switch to low-priced natural gas for fueling our power plants and factories. Better still, gas prices may rise moderately in coming years, but are likely to remain very low, especially in relation to crude oil.
Cheap gas represents a powerful cost saving for consumers and businesses alike. Electricity bills are now 30% lower than in 2008, and we may soon see more savings in transportation as freight trucks (now) and passenger cars (later) run on this inexpensive fuel choice. From agriculture (where gas is used to make fertilizer) to industrial chemicals to aluminum smelters, falling gas prices are helping to sustainably underpin better profit margins. Most importantly, the amount of oil we import appears set to drop sharply in coming years, as U.S. oil production jumps as well.
Consider this item from a recent article in USA Today:
"The U.S. exported more oil-based fuels than it imported in the first nine months of this year, making it likely that 2011 will be the first time since 1949 that the nation is a net exporter of such goods, primarily diesel. That's not all. The U.S. has reversed another decades-long trend. It began producing more crude oil in 2008 than the year before and accelerated that upswing 3% in the first nine months of this year compared with the same period in 2010."
2. The Housing Rebound Is Closer Than You Think
For several years, economists have been calling for an imminent end to the housing crisis. And they've been wrong. Housing can't hit bottom until unemployment rates start to drop. Who wants to commit to a huge purchase in an uncertain economic environment?
That uncertainty may be ending. The U.S. economy is on track to create 60% more jobs in 2011 (or around 1.6 million). And that metric may hit 2 million in 2012, according to economists. Recall the last time job growth hit that milestone: 2004, and consumers responded by buying homes.
We don't need to see a housing boom, just a comeback, and the current numbers hold promise. According to the National Association of Home Builders, roughly 425,000 new homes will have been built in 2011. That marks the third straight year of a reading below 500,000. (The figure averaged between 1.5 million and 2.2 million throughout the first seven years of the past decade).
Let's assume that figure only bounces back to 800,000 by 2013. This still implies that new home construction would need to nearly double from current levels. Notably, there is about a six-month supply of new homes for sale, but just three months of supply when we see demand pick back up again to that 800,000 level. Any meaningful move below six months of supply will trigger a rebound in new home construction.
Sentiment may already be turning. The National Association of Home Builders/Wells Fargo Housing Market Index rose for the third straight month in December, and the index is now at its highest point since May 2010.
3. Baby Boomers Need Stocks
Even as exposure to the stock market has been emotionally challenging these past few years, the millions of baby boomers who are only a decade or two from retiring have no choice but to increase their exposure to equities. Fixed-income investments offer returns that just won't cut it for investors that need to boost the size of their nest egg, and few expect inflation or interest rate-sensitive investments to percolate any time soon.
You can add the "echo boomers" to the mix. These folks, generally in the 30 to 40-year old age bracket, represent another powerful demographic bulge and are also expected to start more aggressively building retirement funds. If stock prices are simply a function of supply and demand, then the demand side of things should create a solid boost for stocks in coming years.
4. Export-Led Growth An Unheralded Story
The dollar had been weakening for much of the past decade to compensate for trade and budget deficits that diminish the standing of the greenback. But the recent economic crises have led to a rebound in the dollar. Once the crises abate, look for the dollar to resume its steady softening.
That would be welcome news for U.S. exporters, which are experiencing a renaissance in global markets. Exports surged in the middle of the past decade, and after slumping in late 2008 and early 2009, have rebounded anew in recent quarters even as the dollar has rebounded. Longer-term, as the dollar weakens anew, U.S. exports are likely to surpass $2 trillion annually.
Risks to Consider: The long-term view is bright, but the near-term uncertainty could still drag stocks lower before any long-term bull market begins. So the right entry point into the market is largely a function of your risk tolerance.
It's no secret that stocks are inexpensive by a range of measures, as I've been discussing for much of the last half year. Yet it's still clear investors are fixated on "what could go wrong" rather than "what could go right." That shift, which may play out in a subtle fashion, will mark the end of the current bearish market environment and the beginning of the next major bull market.
We saw just such a transition play out in the early 1980s. Back then, investors were convinced that the "best days for the U.S. were already passed." Yet as we saw, it's foolish to dismiss the most powerful economy in the world. That's why, despite these near-term worries, you should have an eye toward buying inexpensive stocks for the long-term.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.