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World economy, stock market forecasts continue to be elusive for 2012

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2012 will likely be the third year in a row that experts predict this will be the year that the economy really starts firing on all cylinders and the financial markets make a serious move into new record territory.

Of course, that was a widely held attitude at the start of 2010 and 2011, but the recovery from the Great Recession has proved to be elusive.

“We should probably be thankful that the prospect of a double-dip recession for calendar 2011 is now off the table. But the ongoing double-dip debate will most certainly be shifted into 2012, as we evaluate the potentially deleterious economic impact of Washington and Europe,” said Philip Orlando, chief market strategist at Federated Investments.

However, others find a more positive takeaway from last year and the prospects for the New Year.

“Retail sales, for example, rose remarkably fast in August, September and October. New orders for capital equipment have also risen on balance, while industrial production has shown strength and the index of leading indicators as trended steadily higher. There is an opportunity for an upward move as the economic improvement becomes more widely evident,” said Milton Ezrati, senior economist at Lord Abbett.

Ezrati also believes the situation in Europe will resolve itself in 2012 and, despite common belief, Washington will not implode.

In 2011, profits in the stock market have been as elusive as growth in the economy. Every rally in equity prices is soon followed by jolts from Europe, China or right here at home. Despite some high peaks and low valleys, stock prices overall will end the year at levels very close to where they began.

Again, adding to the frustration is the consistent growth in corporate earnings and profits leading to aggressive stock buyback programs and increasing dividends to shareholders.

For instance, Waste Management (NYSE: WM) announced recently it is increasing its dividend to shareholders for the eighth consecutive year. “Our strong and steady cash flow allows us to return capital to our shareholders, and our dividend is an important part of our capital allocation plan,” said CEO David Steiner.

Earlier, the company had announced third quarter revenues grew by 9 percent and net income in the period was up more than 11 percent, allowing Waste Management to raise the distribution to investors.

It comes as no surprise many forecasts for 2012 suggest investing in quality companies paying increased dividends.

“Companies have choices on how to best utilize earnings: paying down debt, reinvesting in the company, buying back shares and returning earnings to shareholders through dividend payments are all available options. More mature companies that produce cash earnings in excess of growth needs often choose to pay cash dividends,” cites a report from Baird Private Wealth Management.

A growing number of strategists as sticking with a dividend-enriched portfolio for 2012 especially in light of comments from Federal Reserve Board chairman Ben Bernanke who suggested the policy of the Fed will be to keep short-term interest near zero until mid-2013.

Another area of concern is the likelihood of continued volatility. In other words, expect the unexpected.

“Early this year, who would have thought that we would have had an Arab Spring or a European Autumn. Next year, there are potential surprises out there, whether it’s an election surprise, whether it’s further instability in the Middle East, or probably the one that has the least likelihood of occurring as of today would be some bipartisan consensus on deficit reduction,” said John Linehan, director of equities at T. Rowe Price(Nasdaq: TROW).

Of course, another good reason to look toward stocks in 2012 is the fact that few analysts are enthusiastic about the markets, considering the challenges that still exist and possibly could escalate.

“It is an old and unusually valid investment rule of thumb that the herd is about always wrong. This rule gives notice to investors to avoid very popular investments: real estate in 2006, for instance, Internet stocks in 2000, Asian stocks in 2006, and commodities in the early 1980s, just to name a few popular investments that have met disasters.

On this basis, then, it would seem reasonable advice to take at least a serious look at investments neglected by the herd. Now that the lack of flows into equity indentifies them as a neglected asset class, they would seem to deserve that serious look,” said Lord Abbett’s Ezrati.

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