Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Every year the Money Matters team develops a forecast for the year to guide our income-oriented investment strategy. Here are the important trends we see for 2012.
1. Euro Zone crisis. More trouble and disruption in Europe means more obstacles for the U.S. We do, however, think Germany will act in self-interest to prevent a break-up of the 17-member Euro Zone. If the euro collapses and countries revert to their old national currencies, the German Deutsche mark would skyrocket, creating an enormous headwind for the export-driven German economy.
2. The U.S. economy. We are 10 quarters into a moderate economic recovery. Gross Domestic Product (GDP) growth has averaged 2.4 percent since the end of the Great Recession and should continue to do so. Consumer spending stayed strong through the 2011 holiday shopping season; jobless claims have dropped well under 400,000; interest rates remain at historic lows; manufacturers are expanding, and corporations maintain record amounts of cash on their balance sheets. Based on the above, we expect U.S. GDP to expand a moderate 2.0 to 2.5 percent in 2012.
3. Stock market. Look for market weakness in the first half of 2012 followed by an election-year rally that could begin as early as mid-year fueled by moderate U.S. economic growth, stability in the European economy, and the expectation that the presidential election will remove some policy and political uncertainties for investors. In the end, we could see market gains in the low double digits.
4. Sectors. If, as we expect, the first half of 2012 is “challenging,” investors might want to focus on life’s necessities, the products and services represented in the “SHUT” sectors of the market. Increased sentiment in the back half of the year might justify moving into the cyclical sectors, those categories that do well when the economy is on the upswing.
5. Small vs. large. In 2011 we saw large cap stocks finally outperform small and mid cap stocks. This will continue as investors continue to seek the yield provided by large cap U.S. and multi-national companies.
6. Market extremes. Many voices in the financial media claim market volatility is here to stay and that we should get used to day-to-day roller coaster rides. But we think if the Europeans get a grip on their debt situation, we’ll see less market gyration in 2012.
7. More downgrades. Watch for major rating agencies like Standard and Poor’s to downgrade a swath of Europe’s sovereign debt.
8. Pain at the pump. Oil prices have been rising since October, while gas prices have slipped about 6 percent in the same period. That disparity will end in 2012, and we will see gas prices rise in the first quarter.
9. Interest rates. A moderately expanding economy could lead to rising interest rates. We could see the 10-year Treasury note rise from the sub-2 percent level to the 2.5 to 2.7 percent range.
10. Housing. The housing industry will continue to bump along a bottom in 2012. Historically low mortgage rates and rising rents might prompt more people to consider buying a home; however, the glut of inventory will keep a lid on prices for at least three more years.
What do you see coming this year?
– By Wes Moss, for Atlanta Bargain Hunter