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Wednesday, January 18, 2012

Predicting the Stock Market's Direction In 2012

Predicting the stock market's direction is no easy task, even for the best money managers on the planet. Peter Lynch recommends picking good companies and not trying to predict market direction. That does not mean it is not done, and Ken Fisher's Stock Market Advantage demonstrates why with reports on multiple investment group forecasts. 

Some of the results are surprising. For example the Bespoke Investment Group forecasts a 100 percent rise in the Standard & Poor's 500 Index in 2012. It is a surprise given dire economic news coming out of Europe, a slowing China, out of control U.S. national debt,  and a recent World Bank drop in global GDP expectation. These are evidently not of immediate concern to the S&P Index.

Jeremy Grantham echoes a more realistic sentiment in the GMO, LLC 12/2011 quarterly letter.  In it he recommends bias to 'safety' and investment in high-quality U.S. stocks with normal 'weighting' in global equities. In other words, pick strong companies that have investments outside the United States. Grantham also advises against long-term bonds, presumably U.S. Treasuries with low yields and recommends long-term accumulation of ground resources such as potash, and phosphorous which according to the Grantham Foundation for the Protection of the Environment will be scarce within 5-10 decades.

So far in 2012, U.S. markets have rallied considerably in a short-period of time. The San Francisco Chronicle quoting Bloomberg news reported today that the S&P 500 has already rallied 4 percent. That leaves 4.436 percent for the rest of the year after adjusting for inflation per Money Chimp if it's an average year. Grantham attributes this type of market movement to a combination of 'scarily' high-profit margins, low inflation and asset bubbles nursed by Federal Reserve monetary policy, but does not see it lasting indefinitely.  Moreover, Grantham sees a potential overreaction of the S&P 500 Index to as low as 800 points; a reflection of 1970's era market conditions hence, 'no market for young men'.