2012: Time to Put Away the Umbrella?
I consistently look for themes emerging within the U.S. market. I scour news headlines to identify dynamic items that may catch on as dominant storylines. In this pursuit I suppose I am like a baseball scout checking in on dozens of games for a promising pitcher or catcher. The top prospects always get the coverage and are always worth looking for. You spend the time watching them closely because they can help you make money. (Gulf Oil Spill, TARP, Japanese Nuclear Crisis, Deficit Reduction Committee, PIIGS Sovereign Debt Crisis etc.)
Market themes are also like the movie scripts that can be adopted into full scale dramas that can drive the audience /market from high to low, fear to greed, laughter to sadness and all emotions in between. However, there are hundreds of scripts written, so the key is finding the right one that will resonate with the crowd.
As I try to identify the next big story of 2012, I think I have begun to see two likely contenders challenge for a leading role in the news cycle. In my opinion, the next big thing can be found inside the transcripts of U.S. Government data from the Department of Labor and Congressional Budget Office from the past week 12/12-12/19.
There has been recent evidence to suggest 2012 may be modestly better than 2011 for the labor market and federal deficit. The pace of these improvement will decide if the DOL and CBO will get front page billing and develop into major storylines that will drive market performance next year.
One projected impact of a 3 year low in initial jobless claims to 366K for the week ending Dec 10 was proposed by an economist quoted in a WSJ article from 12/16:
"If claims can remain at this level, payroll growth will strengthen markedly within a month or so," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
A projected decline in the unemployment rate was predicted by an economist in a Bloomberg article from 12/12:
"The unemployment rate will fall to 8 percent by the end of next year as more baby boomers retire each month, said Dean Maki, chief U.S. economist at Barclays Capital in New York."
Goverment figures regarding the improved year over year budget deficit and better projections for 2012 were the focus of a Marketwatch article on 12/12:
"Two months into fiscal 2012, which began Oct. 1, the government deficit totaled $235.77 billion, which was about $55 billion lower than the deficit during the same period a year earlier."
"The report was in line with expectations that the U.S. budget gap, while still very high, will shrink in coming years. The Congressional Budget Office predicts a deficit of $973 billion for 2012. The U.S. deficit in fiscal 2011 totaled $1.297 trillion, marking the third consecutive year the gap exceeded $1 trillion."
What Does All This Data Mean?
If the unemplyment rate drops to 8% by the end of 2012 and the federal deficit drops by roughly 325 billion in 2012, at what point do these seeds of optimism show up in market performance? I think it will show up in the first quarter of 2012. The market is forward looking and may accept a string of good monthly job and deficit reports as a trend worth investing in.
What Could Really Happen?
As more people find work, they could pay more income taxes which helps reduce the deficit. At the same time, they could consume more goods and services since they will have more disposible income. More spending could produce stronger earnings, better corporate tax receipts, and more job creation. If the December and January initial jobless numbers are strong, the market could trade up in anticipation of higher consumer confidence and consumer spending versus lower unemployment and deficits.
If these bright outcomes take place, many people could find themselves better off in 2012. But many may continue to be cautious and keep their umbrellas nearby to prepare for the next downpour of bad economic news. Disappointment is a script they are all too familiar with.
I'm putting my umbrella away in 2012.
I'm looking for the S&P 500 to advance 15% to 1400 and unemployment to drop to 7.8%. I also project the yearly budget defict will drop to 800 billion dollars in 2012.