Investment Forecasts for 2012: Financial Predictions for the New Year

by Jeremy C Bradley on 2011-12-305

The start of a new year is upon us once again and it’s time to take stock of how things have gone in the past year. It’s a time when some financial types are dusting off their investment crystal balls or are checking out oddball indicators to see if trends continue for the next year.

When the year closed in 2010, we noted that bonds and cash were relatively weaker than other asset classes, while domestic stocks showed a mild recovery and emerging stocks and precious metals appeared to have done very well. Small cap stock index funds soared in 2010. Fast forward a year and we see some devastation in certain indexes. Basically, things have been downright terrible in many investment sectors this year so if your portfolio is hurting, you’re not alone.

Now that we are ushering in 2012, I am crossing my fingers that things will pick up. I did a tour of financial publications to see what they had to say about the approaching new year, and as it was customary for them to do, they came out with some prognostications.

Performance of Investment Benchmark Indexes For 2010 – 2011

To start with, here’s how each major market has fared over the past few years:

Asset Index 2011 2010
Cash nearly ZERO nearly ZERO
BC Bond Index 7.72% 6.06%
Dow Jones Industrial Index 2.5% 11.02%
S&P 500 Index 3% 13.4%
Nasdaq Index -3.7% 16.91%
Russell 2000 Index -7.62% 25.6%
EAFE Index -16.95% 6.93%
Emerging Market Stocks -20.24% 12.5%
Long-commodity Index 5.6% 16.4%

The differences between 2010 and 2011 are significant in many cases. Compare Nasdaq’s 2010 to 2011 performance. There’s a dramatic shift here and we see this same volatility in most of the market indexes. How can we explain this?

The Investment Markets In Recent Years

Well, the debt crisis in Europe is an ongoing problem. I live in Europe and so I can tell you first hand that the situation is long from being resolved. Take, for instance, the exchange rate between the US dollar and euro. The rate was 1.33 in January 2011 (that’s 1.33 dollars to every euro). In April, the rate was as high as 1.44. For December, the average has been 1.32 and seems to be on a downward spiral. For those of us who convert American dollars to euros, this is great –- we get more from the conversion process –- but from an economic standpoint, the volatility is threatening the markets and investor confidence.

There’s also the issue of the emerging Asian and Latin American markets. I’ve done some comparisons between the two sectors and found that Latin American investors are much more likely to invest in equities rather than debt instruments. Asian investors, like their American counterparts, are more likely to invest in debt. The MSCI Index covers the major Latin American markets and reports that while investors there prefer equity, the markets are much less developed. Only Brazil and Mexico show any meaningful weight. On the other hand, Asian markets (especially in China, India, and Korea) account for more than 51% of the emerging market investments.

The bottom line here is that all markets, whether emerging or developed, have faced significant losses in 2011. The unemployment crisis, continued international conflicts, recessionary cycles, and the European debt situation have all had major impacts on the investment environment. Taken together, they’ve made 2011 a tough year.

economy 2011
Image from CNN Money

Investment Predictions For 2012

Fortune Magazine has called volatility in the markets “the new normal.” But how do investors keep their confidence up and continue to invest knowing how dismal the returns in 2011 were? I’ve worked through the numerous predictions for 2012 and synthesized the following main points:

  • The European crisis will likely be resolved in 2012. Though it may take some time and manipulation on the part of France and Germany, there are strong efforts to prevent the euro from failing. Investors should seize on this opportunity to add Forex to their portfolios.
  • Cash and cash-based instruments are still secure. Investors who are scared about volatility may want to stay with high-yield savings and money market accounts.
  • Investing in individual companies and stocks in emerging markets is a smart move. Think about popular brands like clothing Retailer Zara, based in Spain, and Sunglass Hut, which is based in Italy.
  • Most experts agree that the U.S. market is still the “best” choice, though you may also consider looking at emerging markets, and especially at the U.K. markets.
  • China’s economy may not be as great as we all think. Many experts believe there’s a bubble there that will soon pop. But then again, this type of volatility in the Chinese investment markets is not new.
  • Certain real estate markets are showing stability. Recovery in the housing market in the U.S. may be spotty, but property investors are jumping in. There are opportunities for real estate investing in certain regions, particularly in those areas that have suffered large corrections.
  • Diversification is more key now than ever before. Spreading your investments over many different kinds of instruments and in many different markets will give you more leverage to grow in 2012.
  • Now is not the time to pull out your investments. 2012 may well be the year that things turn around, so don’t be frightened out of the markets and fold in the towel just because 2011 was a bad year. After all, having to deal with investment and economic cycles is part and parcel of the world of investing. If you’re going to invest, do your research and keep up with the markets.
where to invest in 2011
Image from CNN Money

The Bottom Line For The Coming Year

Keep your eye on the emerging markets in 2012. Also, pay attention to what’s happening in Europe. I, for one, have been a Forex trader for a while, and will keep trading Forex just because I can get excellent deals on euros right now. Even though the economy is suffering, our pocket books don’t have to. Once the market turns around, I can sell those euros back and hopefully make some money. Also, keep diversifying and looking for opportunities for your core investment portfolio. 2012 has the potential to shape up into a much better financial year than 2011. While things can get worse, we’d rather believe that there’s no other way to go but up.

So do you agree with these financial forecasts? Are you feeling optimistic (or not) about 2012? We’d love to hear your take on what’s in store for the coming year.

If you’re wondering how to get started with an investment account, check out these SmartMoney broker ratings and Kiplinger brokerage ratings to give you some ideas.

Created December 26, 2010. Updated December 30, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.

{ 5 comments… read them below or add one }

Silicon Valley Blogger December 26, 2010 at 2:35 pm

Update: So how did forecasters do with regards to their 2011 market predictions? In my opinion, not that well. It seems like a lot of predictions fell through. The international investment environment did a lot to shake the confidence of investors. Following is what we wrote here last year about 2011, upon the close of 2010. Here were some of the points that were made about the 2011 economy. As you can see, there were a lot of misses here.

Past Predictions About The Economic Outlook For 2010-2011

From Kiplinger and SmartMoney to CNN Money, predictions abound.

  • The same trends will take us into 2011. The economy continues to be sluggish, but the stock market is expected to behave positively. Why? Seems like US companies are simply running their finances better than the government or personal households. Also, the economy looks like it will continue to slog on rather gradually, due to how weak the housing market is, which tends to be a key economic driver.
  • It’s expected for corporate profits to be at least as good as what we saw in 2006 (which was actually a “top”).
  • Predicted economic growth: a bit over 2.5%, while unemployment can still see double digits.
  • Overall stock returns? Try 7% to 10%, which is in line with historical averages and the market’s dividend yield of 1.9%.
  • Some talk here of the DJIA hitting over 12,000 by the end of 2011.
  • Multinationals, because of their exposure to international markets and consumers, may do pretty well in 2011.
  • Inflation may creep back up.
  • Currency could get weaker (dollar).
  • Bonds don’t look as robust for 2011 after strong gains in 2010. Potential increase in long term rates would affect bonds negatively.
  • Banks may still continue to struggle due to the housing market bust.

Money Managers Picks for 2011

So that may sum up the general picture. Be aware that these are just forecasts, and the analysts here are basing their thoughts purely on probabilities. Now given the economic analysis, you may have some idea about where to put your cash at this time:

  • The consensus is that bonds are overvalued and may fall behind in 2011.
  • Large blue chip stocks are looking like a good area to investigate. Some have dividend yields that are higher than 10 year Treasury Notes. I’m actually tempted to check out these stocks and see if I should dabble into some careful stock picking with diversification.
  • Invest in the likes of Pepsi, GE, PG & IBM. PE ratios for these stocks are averaging 14.8. The following sectors got the nod by money analysts: Industrial, Technology, Consumer Staples and Retail. These sectors are represented by well known stocks such as Oracle, Google, Cisco, 3M, Pepsi and Lowe’s. Please do your due diligence before buying a stock though. I don’t make stock recommendations, although I may mention stocks here that have been touted in financial publications.
  • SmartMoney even offered this statement: The more well known the company, the cheaper its stock seems. Seems telling?
  • Invest globally, with around a 30% concentration in foreign markets. Look to emerging market stocks. Be well diversified with international exposure. Can you “think of yourself as a global investor living in the U.S. rather than as a U.S. investor with some global exposure?”
  • Set aside at least 5% of your portfolio for asset classes beyond stocks, bonds and cash. How about investing in commodities, real estate or precious metals?

Bottom Line For 2011

For 2011, it looks like high dividend paying blue chip stocks and foreign stocks are being favored as the asset categories that may most deserve your investment funds. I would probably prefer to play this strategy by rebalancing my asset allocation in favor of my large cap and international mutual funds or index funds, although choosing individual stocks may also be a possibility.

Rob Bennett December 27, 2010 at 1:18 pm

The consensus is that bonds are overvalued and may fall behind in 2011.

I’d just like to point out a contradiction I see in this statement.

It cannot really be the consensus that bonds are overvalued. If this were truly the consensus, bond prices would be lower. What people believe about an asset class affects what they do about it and what people do about an asset class affects the price assigned to that asset class.

I believe that people believe that the consensus is that bonds are overvalued. That’s something different. I am saying that this belief cannot be accurate because if this really were the consensus the price would show it (and the consensus would no longer exist). It may be that bonds are overvalued and it may be that bonds are undervalued. It is not possible to find out by asking experts in the field what the consensus is. If they knew, they would be able to do something about it and that would change the consensus.

Overvaluation can only exist when the consensus is that it does not exist. Yes, that’s a paradox. But I think it is one that holds up logically. It is possible for a small number of people to detect overvaluation accurately. It is not possible for there to be an accurate consensus that there is overvaluation because a consensus that there is overvaluation makes overvaluation an impossibility.

The people who are saying that bonds are overvalued probably believe this on some level of consciousness. They must also believe the opposite (that bonds are not overvalued) on some other level of consciousness. Otherwise they would act on their belief and bring a quick end to the overvaluation.


Silicon Valley Blogger December 27, 2010 at 2:04 pm

Thanks for the comment Rob. Perhaps we’re talking about semantics here but I’m saying that people have the feeling right now that bonds won’t do too well in the future, if rates start to go up and cause price hits on bonds. In fact, is there really a concept of “overvaluation” of bonds in the same way as other asset classes? I think there may be, but not in the same respect as equities, which is tied to investor behavior much more so. Do bonds go up in price due to supply vs demand? Aren’t they much more sensitive to interest rate changes? I am not an expert in bonds so I am not sure about the extent of effect of demand/supply on bonds (or if there is a strong correlation between supply/demand vs price). I know that bond price is sensitive to rate changes though.

At any rate, with regards to “consensus”, especially in terms of stock price changes, I always thought that there is some “lag time” as far as the market responding to valuation. I know many of the efficient market theorists believe that there is not much of a lag time and the effects of consensus appear immediately, thereby eradicating “overvaluation”. But if that were true and the market was truly highly efficient, then we wouldn’t have opportunities in value stocks would we?

Anyway, just philosophizing. I am open to being schooled by any of you experts. So bring on your arguments. 🙂

krantcents December 27, 2010 at 6:06 pm

Bond prices are going down because of the current Fed policy QE2. I decided to sell my bond position and added to my equity positions for the near future. Otherwise the forecast is fairly rosey!

Silicon Valley Blogger December 30, 2011 at 3:41 pm

We’ve done an update to see how things turned out in 2011 (and to gauge what may happen this coming year). From what I’ve seen about 2011, it appears that the markets did an about face from what we were expecting for the year. So it’ll be interesting to see what stuff unfolds and whether talking heads will be more accurate with their assessments this time around. My personal vote? It may be time to look into real estate investing if you’ve got the extra funds.

Leave a Comment