Economic Outlook 2012 - Stocks
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Several useful valuation methods such as dividend yield and price / average long term earnings suggest the next 10 years' returns will be lackluster. This favors active management and bargain stocks as opposed to an index ora buy-and-hold strategy. Volatility will remain high and with it periods of risk and opportunity.
Election years are usually good for stock investors. However, this is most often the case when voters are optimistic. Currently, we find an extreme level of voter disapproval. In the past, the public's displeasure is often reflected in substandard returns.
A strong dollar may create difficulties as well. Historically, a rising dollar often reduces export sales which many corporations rely on for growth. Additionally, our research shows that corporations may not be able to pass along all of their cost increases. This could hurt profit margins.
We do find opportunities, especially in bargain stocks. In addition, companies that reward their shareholders with solid dividends and buy back their own shares tend to perform better in periods of high volatility. Similarly, companies with a greater focus on domestic sales and imports may be able to take advantage of a stronger dollar. Likely winners in this environment include importers such as discount retailers.
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Negatives |
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Deficit spending a temporary help |
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Stock valuations are high |
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Phenomenal corporate earnings |
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Corporate insiders are selling |
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Voters disapprove of current policies |
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Strong U.S.dollar usually hurts earnings and exports |
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Profit margins at risk |
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