When it comes to the market and stocks, I’m probably not the only one ready to close the door on 2011 and focus on a new chapter. But while a fresh start always provides a spring board for optimism, the big question going into the New Year is whether that optimism will bear fruit. Because as it stands, the global economy is battling a number of headline issues that continue to weigh on sentiment.
- The Euro Zone
As if I have to remind anyone, the Euro zone remains market enemy #1. So far, in spite of the endless line of remedies thrown at this financial sink hole, nothing has been able to provide any meaningful long-term solution. In the meantime, bond yields continue to rise, putting addition pressure on an already fragile situation. The Euro zone needs to show meaningful signs of stability to boost investor confidence and put a long-term bid back into the market.
- China is Slowing
China has been one of the great economic growth stories of the last ten years, stimulating GDP growth in its trading partners and sucking up natural resources at a breakneck pace. But in the last few months, the country’s torrid growth trajectory has begun to show signs of cooling. That has the investors very concerned that a drop in GDP growth from 10% to 7% could have a serious impact on the global economy. If there is one caveat in the story, it’s the fact that China itself has no interest in watching its economy crumble on top of itself, so if further signs of weakness appear, it will be very difficult for the central bankers and politicians to resist simulative measures to keep things cranking.
- The US has too Much Debt
And finally, creating the perfect trifecta of uncertainty is the US, which continues to battle its own financial demon with an unsustainable deficit and too much debt. So far, the country’s weakening financial profile has yet to show up in higher bond yields like it has in Europe, but if that conversation gains traction, things will get ugly pretty quick as the only “risk-free” asset in the world, US Treasuries, suffer from a lack of confidence.
Is There Anything to Feel Good About?
The answer to that question is absolutely. The first place to look for confidence is in the private sector. Remember, the problems with the market and global economy is not related to the private sector; its problems come from the financial sector and bloated government balance sheets and entitlements. Yes, there is a correlation between GDP and the pending austerity measures required to get things back in lin in the US and Europe, but for the time being, earnings have continued to move higher and projected to continue to do so. In fact, the S&P 500 is back to peak earnings from 2007 while the index trades at a 25% discount. That means this strong trend in earnings has sweetened the valuation picture considerably.
What about the Central Banks?
As much as I hate central bank and political intervention in what is supposed to be a free and capitalistic market, the reality is that both of these entities have and will have a profound effect on economic growth and asset prices. What that means in a nutshell is that we could be looking at a situation where bad news is good news, because the worse things get economically, the more pressure the central bankers will have to get in there and stimulate. And once one central bank moves, it creates an incentive for others to do so in what boils down to a race to the bottom for the weakest currency to stimulate exports. So even though the central banks and politicians don’t belong in the economy, anyone watching the market and buying stocks needs to pay close attention to what these guys are up to.
The Take Away
So that’s a quick look at the headline issues we confront heading into 2012. If it sounds a lot like what we saw in 2011 then you get a gold star for being absolutely correct. That means it should be another wild and crazy year filled with tons of volatility and uncertainty, so be sure to adjust your portfolio accordingly. If that makes you nervous, then avoid growth stocks, small caps and emerging markets and shift into large caps, utilities and dividend stocks. But if you see opportunity when others are fearful, 2012 could be a great year invest and move into risk assets, because there is certainly no shortage of fear and uncertainty on the Street these days.
Let’s go ahead and talk about some stocks.
Updates:
If there was one thing that we learned this year, it’s that when the market gets worried about growth, growth stocks quickly fall out of favor. So if you are looking for more stability in your portfolio, here are a few good names that will be on my radar.
Google, Inc. (GOOG)-leading search engine expected to make $38 a share in 2012. That is some serious earnings power for a share price trading at $640.
International Business Machines (IBM)-shares trading at an all-time high but this mega-cap, blue-chip traded strong all year in spite of tons of uncertainty and volatility. Company also pays a nice little 1.6% dividend.
Visa (V)-was also an all-star player in a weak market, hitting a series of new highs in 2011 in spite of the uncertainty. The company is expected to make $7 a share this year so the valuation picture looks pretty solid too. Mastercard, Inc. (MA) traded much the same, so either one of these guys will get you a stable pick with nice upside.
Verizon Communications, Inc. (VZ)-finished 2011 ahead of the market with a 10% gain, and when you throw in a 5% dividend yield this is another stock that traded strong in a tough market.
And finally, we have Exxon Mobil Corp (XOM), the largest company in the world. Energy was the worst performing sector of 2011, so XOM’s 16% gain and 2.2% yield look like a good send compared to its peers.
That’s all for this week, but until our next update, here is a good article on how bonds had a great year as investors moved away from risk and shifted into more conservative assets amongst all the uncertainty. Enjoy.
Bonds Prove Best Asset for First Time Since 1997
Your investment Partner,
Mike
