A
veteran investment strategist sifts through mountains of information overload
to find the way forward -- and takes stock of his 2011 prognostications
As the winter sky began to darken in New York
City on the afternoon of Dec. 30, 2011, the streets were filled with shoppers.
Most of them were likely not paying much attention to the current price of the
S&P 500 Index, nor did they realize what was about to occur. Then, it
happened — like a UFO (unlikely financial outcome): A less dramatic version of
those end-of-day dips that were a daily occurrence during the summer swoon, but
just enough to land the S&P at 1257.91 at the year’s close. Yes, after 12
months of stomach-churning volatility, S&P ended up a mere 0.27% north of
where it had closed in 2010.
My goal in my first article for RIABiz of the
new year is to try to cut through the information overload that threatens to
kill investor confidence. Investors have been worried enough after 2008, they
don’t need to hear barking from all sides about the markets and what they
should do with their money. But that’s a fact of 21st century life, unless you
decide that you prefer a TV with rabbit ears in your den, a rotary phone in
your bedroom and an icebox in your kitchen.
So below, I will attempt to clarify where I
think we are going in 2012 and provide some direction for how to simplify the
process of navigating the information maze to get at what investors really
should be focusing on. This is getting tougher to do all the time, as they find
themselves surrounded by high-frequency traders, gigantic “too big to fail”
financial institutions and a wide variety of scammers, biased brokers and TV’s
financial evangelists. My quest here is to find some answers, and vault you
into the new year with confidence and clarity.
1. Sentiment
In the often backwards way of Wall Street, when the crowd is bullish,
its often a good time to be bearish, and vice-versa. As reported by Barron’s in
its Dec. 31 issue, “resolutely optimistic sentiment…prevails among a goodly
number of investors. The latest tally by Investors Intelligence showed that the
percentage of bullish advisors had topped the 50% mark versus 29.5% who were
bearish. Similarly, the most recent survey of members of the American
Association of Individual Investors showed 40.6% bullish and 30.9% bearish (the
rest did not lean heavily to each side). As always, I’ll be watching sentiment
indicators like these for signs of the herd piling on in one direction or the
other…then seriously start looking the other way. Contrarian investing can be a
lonely exercise, but it can also save your skin.
2. The continued level of U.S. 'misery’
The Misery Index is simply the sum total of the headline unemployment
rate (what the government refers to internally as “U-3”) and the headline
consumer price index — that’s the one that excludes food and energy.
At year-end, the index was at 12, as unemployment had dipped down to
8.6%, and CPI was at 3.4%. The index hit an all-time high of 22 back in 1980
(which helped Ronald Reagan win the White House from Jimmy Carter) and an
all-time low during the “Happy Days” era, in 1953 (no wonder Fonzie was always
in a good mood!) While I am agnostic in my writing as to election-year
presidential politics, it should be noted that a Misery Index of less than 10
has historically been good to incumbent presidents, and an index reading above
10 has not.
3. U-6 Unemployment
While the U-3 grabs the headlines, in my mind, the true reflection of
America’s jobless situation is contained in the government’s U-6 unemployment
figure. This is far more prevalent in media reporting the past couple of years,
as the figure has grown to a disheartening level and the so-called “99ers”
(those unemployed for a least 99 weeks, when at one time benefits were provided
for only 26 weeks) have grown in ranks. Unlike U-3, U-6 includes those who are
underemployed, working multiple part-time jobs when they really want a
full-time job, and those who are working at levels below their skill set just
to get by. As of the December report from the government, U-6 was a tad over
16%. I think this is THE decisive number that must come down in order for us to
see a sustainable improvement in the U.S. economy and markets, and, by
association, those of our major world trading partners.
4. Trading ranges or a true market move?
Since Christmas week of 2010, we have seen two trading ranges for the
S&P 500. Roughly speaking, the first was from 1370 to 1260. Once 1250 was
broken to the downside in dramatic fashion in early August of last year, the
index fell to 1100 (on a closing basis, in another chaotic start to a month, in
early October) and stayed in that 1260-1100 range through year-end, closing
right near the top of that range. Will 2012 prove to be a year in which global
equity markets start a sustainable move (i.e. one that doesn’t simply excite
bulls or bears, then quickly fade) or will we see more of the same — a lot of
“action” with tepid results.
5. High correlation among components of stock indexes
Here to stay, or passing phase? I have no idea which it will be, but I
do think that there have been and will always be subsegments and companies that
can stand out from the herd over a period of a few years. But the key to this
“watchlist” item for 2012 is whether investors start to figure out that
investing in the headline indexes is not what it used to be, as noted above.
Now, when you invest in an S&P or Dow Index Fund, you are keeping company
with a very different crowd than you were a decade ago.
6. Will the U.S. continue to be the world’s perceived safe haven?
At this point, the U.S. Federal Reserve must be thinking: “No matter
how bad our situation is here, it just doesn’t matter because the world still
believes our printing press makes us the safest bet. Or, as one commentator
recently put it, “The U.S. used to be the prettiest house on the block…now it’s
the only house on the block.” This has the potential to put an artificial net
under the U.S. stock and bond markets, masking our internal economic problems,
budding class warfare, etc. It certainly “bears” watching (pun intended).
7. Will stock market volatility chase away more retirees and pre-retirees,
and by doing so ruin more people’s retirement dreams?
This is more anecdotal than scientific, but there have been at least
three opportunities to throw in the towel on investing in the public markets
since the year 2000. We saw a major pullback from 2000-2002, another in 2008
and the again in 2011 (though the full-year results did not tell the scary
story of the year that was). To some investors, its been “fool me once, shame
on you, fool me twice, shame on me, fool me three times…I’m outta here!”
Participation by so-called “mom and pop” investors may be in decline, as
evidenced in volume figures on the stock exchanges. Despite the increase in
trader activity, overall volume has been low for some time. It’s my firm belief
that there are other ways for retirees and pre-retirees to approach the public
stock and bond markets, but my fear for them and for the advisory industry is
that too many of them will turn away and not come back, that is, until after a
major bull market has nearly run its course. Try as we might, our industry
still battles the fight or flight response from clients each day. This is
important to monitor in 2012 and beyond, for obvious reasons.
8. Will the Euro survive … and if it does, will that be worth it?
Trying to get 17 people on the same page about where to go to dinner is
tough enough. How about getting 17 nations, with cultural differences built up
over centuries, to agree on a plan to save their collective economic
well-being? And you wonder why Europe’s strife dominates the financial
headlines? We certainly can’t control the results, but we can continue to look
for opportunities to exploit as the “Europe-on, Europe-off” game continues to
be played by market participants. The good news: Ireland, yes little Ireland,
which was an early villain of the crisis, is starting to get its house in order
and take advantage of its cultural connection with the United States and others
to grow again. A small victory, but the European Union will take any success
story it can.
9. Will gold (and to a lesser degree, silver) retain its 'currency of
choice’ role in the world markets, or has the top been reached already?
There is growing concern among market technicians (i.e. chartists) that
gold is done. If gold is done, silver is likely done, too. Keep in mind that
while gold is down roughly 20% from its peak of around $1850 an ounce last
year, the case can also be made that it never should have gone there in the
first place. For the sake of comparison, the Nasdaq Composite Index, the
high-flyer of the internet boom of the 1990s, closed 1998 at 2192. It finished
the year 2000 at 2470. When you look at it that way, and consider that in
between those two year-end mileposts, it ran up to 5132 and crashed to 1387, it
makes the dot-com bubble look like some kind of optical illusion. Could gold
have just had its own, mini-version of that? 2012 should provide the answer. If
so, that’s one less place to flee in times of trouble, and investors will need
to have a Plan B.
10. Does China prove the
naysayers right and implode in a U.S.-style crash from over-building or does it
continue to lead the long-cycle uptrend in Asia?
To be sure, China has its critics, and the criticisms are not without
merit. But I wonder if the China Monster concept is overblown. After all, if
China’s economy is, as some say, built on false figures and a heavy-handed
government, what is supporting its continued ability to grow its economy at a
far more rapid rate than ours? Is it, perhaps, all of the interest they are
receiving as the largest external holder of U.S. Treasury securities?
Bottom-line, as I was told several years ago, China is the biggest “client” of
the U.S. and we are tied together for better or worse.
I do believe that regardless of China’s near-term issues, the rest of
Asia is on the up escalator. Economies in the East are growing for all the
right reasons — younger population, work ethic, strong savings culture, and
they are beneficiaries of a trickle-down process whereby as China’s middle class
grows, the smaller Asian countries become the manufacturing Goliaths that China
used to be. Throw in the fact that these countries are major suppliers to
China’s local economy (which, in my opinion, does not need the U.S. and Europe
as much as they need China) and the Asian “Tigers” are primed for a decade of
outperformance versus the West. Just think about the enormous task of supplying
healthcare to a burgeoning middle class in China and you get the idea that this
is not a train that will be derailed by any cyclical “crisis.”
11. Is this the year that natural gas finally breaks into the energy mix in
a big way?
This brings to mind that word “sustainable” again. Every time we have
an energy crisis (that is, every time it appears our supply of oil may be
threatened), natural gas enjoys the limelight alongside lesser-developed
alternative energy sources such as solar and wind. That lasts for days or
weeks, and then fossil fuel again resumes its status as America’s energy
sweetheart. As many have said, we are the Saudi Arabia of natural gas. But
unless we exploit that, it is no better than having a huge collection of
pennies — big in number, but does not amount to much.
12. Which is more powerful: spending/savings rates of existing consumers or
a demographic trend toward growth in number of consumers?
This last one has a lot of tentacles. On the one hand, the consumer
savings rate, which vaulted higher in the depths of the recent recession, came
down just as fast. Americans’ desire to shop may land them in the same position
as they were a few years ago, as some of that very helpful “deleveraging” of
consumers balance sheets has reversed itself. Amidst that trend, there are
early signs that as more and more new consumers enter the population (i.e. the
kids grow into consumers more like mom and dad), many of them have fortunate
timing. Specifically, they worked the past few years, had no reason to buy a
home in the falling knife that was the U.S. housing market, and now have decent
savings, decent credit, and are able to become first-time homebuyers. This is
one big reason why, as 2011 ended, there was reason for some optimism amongst
homebuilders for the first time in recent memory.
What I said last year
At the beginning of 2011, I made some predictions about where some
major market indicators would travel to during the year, and where they would
end it. I also listed what I guessed would be the most important market factors
of 2011. Here’s how that exercise turned out.
Predictions for 2011
S&P 500 Index
Predicted high: 1370
Predicted low: 990
Predicted close: 1320
Grade: not bad. I hit the high right on the nose (1370.58 on May 2).
The market low (intraday) was 1075, hit in October. This was about 14% down
from the start of the year, and a decline of over 22% from the May high. So my
expectations for a rough period during the year were on target. In fact, I
guessed that we would have both a 20% gain and 20% loss within the calendar
year, and both did indeed occur. I also characterized the year ahead at that
point as “Sell in May…then hope and pray,” believing that the market would more
likely face the world’s cold realities in summer and autumn. This too was on
track. But I also thought that Emerging Markets would beat U.S. stock markets
and that was clearly not the case in 2011.
Back in late 2010, I predicted for 2011 an S&P range of 950-1250
and the actual was 1011-1259, so while I am not the kind of strategist that
rests his reputation on market calls, I seem to getting the hang of this game.
10-year U.S. Treasury yield
Predicted high: 4.8%
Predicted low: 2.8%
Predicted close: 4.4%
Grade: The truth hurts — I was way off. Yields started the year higher,
but peaked around 3.7%, started to fall on fears of European disruption
(Greece, Italy, Spain, etc.) and while I figured the logical reaction would be
for investors to abandon Treasuries, they flocked them like fans at a Beatles
concert. Yields on the 10-year plunged to an unthinkable 1.7%, and closed the
year around 1.9%. The unthinkable happened, and my only solace is that I have
been predicting the demise of the U.S. Treasury market for about eight years
now, and have come up empty each time. The sad news for market participants is
that at some point, Treasury Bond bears like me will be right. And that will be
an ugly event.
My predictions for 2012
S&P 500
2012 high: 1430
2012 low: 1000
2012 close: 1400
10-Year US Treasury Yield
2012 high: 3.6%
2012 low: 1.7%
2012 close: 2.8%
Market environment:
·
40% range from top to bottom in S&P 500
·
Emerging Markets hold up much better this time
around
·
Europe works toward real reform at a snail’s
pace, but the market eventually gets used to it
·
Treasury rates spike, retrench, but set the
stage for a very nervous credit market in 2013 (post-election)
·
Gold more likely hits $1,000 instead of $2,000
So, as 2012 ticks on, will investors be optimistic or just, well,
ticked off? I look forward to watching and analyzing it with you.
Rob Isbitts
RIABiz
Rob Isbitts is the founder and chief investment strategist of Sungarden
Investment Research, and offers advisory services through Dynamic Wealth
Advisors. Rob is a 25-year investment industry veteran, author of two
investment books, creator of several portfolio strategies, and former chief
investment officer and mutual fund manager. He currently advises a limited
number of high-net-worth private clients and provides outsourced investment
strategy and research services to financial advisors from South Florida. Rob
can be reached at risbitts@dynamicwealthadvisors.com.
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