Market Overview

Is 2012 Going To Be a Repeat of 2011?

Will 2012 be a repeat of 2011 for the stock market? There is a fair chance that it could be.

With the tremendous volatility and uncertainty in the stock market in 2011, the stock market ended flat for the year. Bloomberg Businessweek: "The Standard & Poor's 500 index closed 2011 a fraction of a point below where it started the year." Even so, in taking into account an annual inflation rate in the US of 3.4%, one might say that the markets technically ended in a loss for 2011.

As Reuters put it eloquently, "2011 was a long wild ride to nowhere" -- a roller coaster of stagnation. Reuters suggests that we might revisit the same themes in 2012. As the US struggled with unemployment, natural disasters, political uncertainty, and debt issues, the globe had its own issues to contend with including problems in the Middle East and the Eurozone debt crisis. According to Reuters, "[s]imilar events probably await investors in 2012." Thus, we may be in for another wild-ride roller coaster in 2012.

With all the volatility and uncertainty, it may be hard for some traders and investors to anticipate a substantial rally in 2012. TheStreet.com's Robert Holmes recently asked a bold question in a very interesting article: "What if there's a bear market in 2012?" In the article, Holmes analyzed year-end targets for some of Wall Street's biggest firms. According to Holmes' article, Deutsche Bank (NYSE: DB) is expecting a rally of nearly 20 percent in 2012, an S&P 500 target of 1500. Holmes: "Among strategists at major Wall Street banks, Deutsche Bank is the most optimistic about the S&P 500's performance." Per Holmes' article, as the average of the 12 firms' year-end targets for the S&P 500 is roughly 1348, it would appear that (in the wisdom of the Wall Street crowd) there is a somewhat bullish sentiment for investment firms. Nevertheless, Goldman Sachs (NYSE: GS) forecasts the S&P 500 ending 2012 at 1250 and HSBC (NYSE: HBC) forecasts the S&P 500 ending at 1190.

While optimistic sentiment and hope may be growing, Holmes suggested that the market could face some considerable headwinds in 2012. According to Robert Pavlik, chief market strategist for Banyan Partners, "the market could be dealt a massive shock if the Eurozone countries don't ratify whatever proposal is offered." While some doomsday economists may fear a total market collapse in 2012, according to Holmes, each of the five investment managers interviewed for his article "said that while a 20 percent correction in the coming year is plausible, it's not likely". That being the case, Holmes later wrote that, "The ramifications of a 20 percent drop [in the stock market] are easy to outline" including a drop in investor confidence, political uncertainty & tension, a rise in unemployment, and "more intervention by the Federal Reserve" among other things.

Holmes concluded in suggesting that if investors face a 20 percent drop in equities in 2012, a mass exodus from the stock market is possible. Weary investors and traders may begin to look elsewhere for profits. Holmes: "For investors, another collapse in 2012 could mean that many throw in the towel on the stock market." (Gold and silver, anyone?) Holmes went so far as to write, "Another drop in 2012 could result in a generational change in investing and spending habits". Given inflation, one has to wonder what the implications of a generational change in investments and spending would look like.

Even if some are optimistic about the stock market in 2012 right now, others are gloomy. MarketWatch's Brett Arends recently warned, "Get ready for 2012. Because if the markets around the world are to be believed, this is the year when something's gotta give." According to Arends, investors and traders should be wary of US stocks if the global financial crisis gets worse. As for currencies, Arends is equally as ominous: "The euro will almost certainly come tumbling down." Arends commented that maybe everything could work out in the end, but even with that hope, "Something's gotta give". Given the state of the US economy, the something that's gotta give to give in 2012 may be the same something that had to give in 2011: the weary US taxpaying consumer.

If the investment firm strategists are correct in their assessment of what the stock market will do in 2012, 2012 may very well be a repeat of 2011.

If we take a look at the S&P 500 for 2011, we can see a sort of wave pattern as stocks rallied to a peak in the first half of 2011 and descended into a valley in the latter half of 2011 while struggling to get back to even. Given global turmoil, market uncertainty, and political dysfunctionality, we may very well see a similar wave in 2012 where stocks either rally at the beginning and descend in the second half of 2012 or where stocks take a dive in the first half of 2012 (owing to Middle East warfare, currency issues, or natural disasters) only to work their way back to even at the end of 2012. In the alternative, the choppy, uncertain volatility could extend into 2012 making all of 2012 into a sort of stock market roller coaster.

Where it may be tempting to believe the investment firms' forecasts in Holmes' article, I am reminded of the recent sentiments of MarketWatch's Paul Farrell. In weighing the prospects of a 10 percent rally for the stock market in 2012, Farrell was highly critical of traditional establishment economists that work for banks, the government, and various corporations. Farrell: "They're more like speech writers, hyping short-term policy agendas, while dismissing long-term consequences."

Though Farrell's perspective may sound a bit cynical, investors and traders may want to be skeptical of investment firms' strategists' forecasts for 2012. To echo the words of Jim Cramer: "We know we've got an unstable market." Going along with Cramer's investment strategy, we cannot forget about gold. Whereas the stock market remained stagnant in 2011, gold had a 10 percent gain -- an 11th consecutive year of gains. If the drumbeat of inflation in the US gets louder, traders and speculators can expect gold to rise in 2012.

Even aside from turmoil in the Middle East, the Eurozone crisis, and political uncertainty, one key to 2012's fate will be any possible actions by the Federal Reserve. One might say that inflation is a specter that is now haunting the market. If QE3 is in our future and a massive inflationary event hits the US economy, even if equities appear to remain flat in 2012, between taxes and inflation technically the year will end in a loss.

It is significant to note that Holmes' article, the Reuters article, and the Bloomberg Businessweek article above did not seem to mention inflation regarding stocks ending flat. Given the phenomenon of inflation, the $100 you hold today will not be worth $100 one year from now. If you give a loan to your friend for 5 percent interest with payment due in a year and if inflation is at 5 percent, then inflation is effectively eating up your profits. As economist Henry Hazlitt noted, inflation works as a kind of tax. Thus, with the prospect of inflation, if equities remain stagnant in 2012, they will effectively be at a loss for the year. As goes the old adage: If you're not growing, then you're dying. As daunting as economic stagnation may be for traders and investors, 2012 very well may end up looking like 2011. Something to keep in mind for the stock market in 2012.

ACTION ITEMS:

Bullish:
Traders who believe that the stock market will rally in 2012 might want to consider the following trades:

  • Go long on SPDR Dow Jones Industrial Average ETF (NYSE: DIA), iShares Dow Jones US Index Fund (NYSE: IYY), and SPDR S&P 500 ETF (NYSE: SPY).

Bearish:
Traders who believe that 2012 will leave the stock market flat just like in 2011 may consider alternate positions:

  • Check out SPDR Gold Trust ETF (NYSE: GLD) and iShares Silver Trust ETF (NYSE: SLV).

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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