2011 = Volatility; 2012 = Muddling Through?
2011 was remarkable for its volatility, both in worldwide events and in investment markets. Protests and demonstrations took place throughout the middle east and elsewhere. Osama bin Laden, Muammar Qaddafi and Kim Jong Il all met their demises. We have seen the flaws of adopting a common currency (euro) without common cultures and fiscal integration. And also experienced suffering and destruction on a grand scale as the costs of natural disasters were estimated at $350 billion: Earthquake and tsunami in Japan ($210B), Floods in Thailand ($45B), Earthquake in New Zealand ($25B), Hurricane Irene along the east coast ($15B) and Tornadoes and storms in Alabama ($12B).
We know several things that will happen in 2012: a U.S. presidential election in November, Summer Olympic games in London and craziness accompanying the supposed end of the world on 12-21-12. The question for equity investors is which way are stocks headed in what some are terming as the Great Stagnation – where reduced public spending and anemic private sector growth makes it feel like the economy is churning but not really going anywhere.
There is a tug of war happening over the long-term inflationary outlook that could be decided this year. The price of gold has been on an upward trajectory since 2007, an indication that some investors feel that inflation is read to take off. That would normally be very bad news for government bonds because inflation erodes the value of fixed-term investments. However, ten year Treasury bonds are yielding less than 2% which indicates that bond investors are far more concerned about deflation rather than inflation. Either of these divergent outcomes could lead to serious challenges for the economy. The best outcome for stock investors is for both of these camps to be wrong and that the global economy will continue to muddle through, with low interest rates and little inflation.
Also look for an inflection point in 2012 where emerging economies overtake developed economies in the percentage share of world imports. In 2000, they only imported half as much as rich countries so there has been a major shift over the last decade plus. It is anticipated that China will overtake America as the world’s biggest importer by 2012. This rapid growth in developing countries’ buying power will boost the profits of companies in rich economies over the coming years.
Source(s):
Bloomberg Businessweek, December 26, 2011 – January 8, 2012. pages 15-25, 82.
The Economist: The World in 2012. pages 139-140.
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Tags: Alabama, China, financial planning, Gold, Hurricane Irene, Japan, jeff mcclenning, Keen Insight Group, Kim Jong Il, Muammar Qaddafi, New Zealand, norcross, Osama bin Laden, peachtree corners, Thailand
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