Raul Elizalde - Thursday, January 5 2012
Hollywood has a typical formula for movies. They start well so the audience
knows what is at stake if things go wrong. Invariably they do, but whatever is
lost is eventually recovered by the time the movie ends.
By that standard, the 2011 stock market followed a simple Hollywood script. The first few months brought cheers, only for everything to go wrong by mid-summer. Slowly things improved towards the end, and the stock market recovered from severe losses to end the year just where it started.
That movie won’t win any awards. No clear reason was given for why things finally got better. As a result, the audience was left with little hope that they wouldn’t worsen again. The end was less a cliffhanger than a letdown, and the 2012 sequel looks less like a sequel than a rerun, as it starts just like 2011.
The first few data points of the year continue to show a moderate improvement in economic conditions that started a few months ago. Unemployment is a notable indicator, as jobless claims are now at the lowest level since July 2008. Furthermore, private employment has taken off, and government employment, apart from a census-related peak in 2010, has been declining for the last two years. While the US still has a long way to go, it seems that it is heading in the right direction. All this suggests that along with record corporate profits, good times may lie ahead for the stock market.
In addition to encouraging economic signs, market cycles also offer reasons for optimism.
Since 1901, the Dow Industrial Average history had 14 years when the last quarter climbed more than 11.5%, including 4Q11 when it gained almost 12%. Out of the 13 previous times, 10 were followed by a positive first quarter. Also, 10 were followed by a full year’s return averaging more than 15% (or with a median of almost 21%). The only times a full year was down after a positive 4Q were 1906 (prior to the Panic of 1907), 1929 (the onset of the Great Depression) and 2002 (the aftermath of the dot-com implosion and the beginning of the Iraq War).
This is where 2012 seems better than 2011. If the pattern holds, the only thing that would prevent 2012 from being a positive year is a large shock that would obliterate otherwise benign market and economic conditions.
As far as we currently know, the danger comes from Europe; we also know that spoilers can come from anywhere. But Europe may well avoid a disaster, and the US may manage to stay on track. If so, the way 2012 just started suggests that it could end leaving stock market investors far more satisfied than after the year that just finished.
By that standard, the 2011 stock market followed a simple Hollywood script. The first few months brought cheers, only for everything to go wrong by mid-summer. Slowly things improved towards the end, and the stock market recovered from severe losses to end the year just where it started.
That movie won’t win any awards. No clear reason was given for why things finally got better. As a result, the audience was left with little hope that they wouldn’t worsen again. The end was less a cliffhanger than a letdown, and the 2012 sequel looks less like a sequel than a rerun, as it starts just like 2011.
The first few data points of the year continue to show a moderate improvement in economic conditions that started a few months ago. Unemployment is a notable indicator, as jobless claims are now at the lowest level since July 2008. Furthermore, private employment has taken off, and government employment, apart from a census-related peak in 2010, has been declining for the last two years. While the US still has a long way to go, it seems that it is heading in the right direction. All this suggests that along with record corporate profits, good times may lie ahead for the stock market.
In addition to encouraging economic signs, market cycles also offer reasons for optimism.
Since 1901, the Dow Industrial Average history had 14 years when the last quarter climbed more than 11.5%, including 4Q11 when it gained almost 12%. Out of the 13 previous times, 10 were followed by a positive first quarter. Also, 10 were followed by a full year’s return averaging more than 15% (or with a median of almost 21%). The only times a full year was down after a positive 4Q were 1906 (prior to the Panic of 1907), 1929 (the onset of the Great Depression) and 2002 (the aftermath of the dot-com implosion and the beginning of the Iraq War).
This is where 2012 seems better than 2011. If the pattern holds, the only thing that would prevent 2012 from being a positive year is a large shock that would obliterate otherwise benign market and economic conditions.
As far as we currently know, the danger comes from Europe; we also know that spoilers can come from anywhere. But Europe may well avoid a disaster, and the US may manage to stay on track. If so, the way 2012 just started suggests that it could end leaving stock market investors far more satisfied than after the year that just finished.
Raul Elizalde | raul@pathfinancial.net
©2011 Path Financial LLC
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