Did you know that the US stock markets ended slightly up last year? It probably didn’t feel that way to you though. And we don’t mean to say that they were up a lot…they were simply barely up. But the way they ended gives a totally different picture of the ride to get there. We’re continuing a series on predictions for the year 2012 and beyond. Today’s prediction…
2012 will see extreme volatility in the stock markets again. Actually, we think they’ll be even more volatile than last year, but such a thing is really in the eye of the beholder. If you were exposed to the huge losses and recoveries of last year, then you might feel like you just finished running a marathon and find yourself gasping for breath. If you’re not exposed this year, you might barely notice the news mentioning upticks and downticks.
2012 has begun with a bang, up about 6%. That right there would normally be enough for us to predict a big up year in the market since most years tend to follow after the January start. And perhaps it will be, but I’m expecting those gains to be erased sometime fairly soon. And then…Who knows?
But we can’t call this, The Year of the Black Swan, and not expect volatility, right? In our next post, we’ll explain why we tend to think the stock market will end below where it began the year, but we’re not nearly as confident in that prediction as we are that the year will see huge moves in multiple directions.
Here’s some of the reasons why…
The trouble in Europe will surely come to a head this year. This could be good for the stock market (if somehow the troubled debtor countries are bailed out in a way that seems sustainable to the markets.
Or it could be very, very bad for the stock markets if the European sovereign debt crisis goes up in flames through default and the onslaught of contagion.
In the meantime, it’s also possible that the game that’s been played out over the past 6 months continues on. The European powers continue to kick the can down the road by providing enough bailout money to solve the problem this week/month, but not enough to do much past that. This results in the market being very happy for a week or so, followed by depression…until the next short term solution is announced. This means volatility. We don’t think they can play that game too much longer, but who knows? And that’s just Europe.
War in Iran could send oil prices into the stratosphere. We’ll talk about this in a later post, but the US certainly seems to be gearing up for war. This could seriously hurt the economy and scare the markets if it were to happen.
A hard landing in China would devastate the world economy. Right now the world believes that China has escaped having to pay for all its mal-investment. Markets would tumble if China’s economy was seen as weak.
Japan’s 20 year depression could come to a head. Japan has been able to borrow money at super cheap rates to amass the largest debt/GDP ratio in the world. They could do this because they saved money every year and bought Japanese government bonds AND because the country exported more than the imported, so the world had a need for the Yen. Neither of these is true anymore.
The Fed could announce QE3. This could make the stock markets take off to the upside in excitement because the mighty Fed is back in charge…because that’s worked so well the first two times??? Well, even if it’s without reason, so far that has been the market reaction and could certainly happen this year. (And don’t forget the Central Banks of Europe, UK, Japan, & China doing the same.) So these could cause big up moves in the market.
It’s a wild world out there and we expect that to be clear in the stock markets this year. Those are just a few of the top of mind reasons why.
This is the fifth post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 1) Ben Bernanke’s Dollar Devaluation Plan, & 2) The Coming US Dollar Devaluation. You can also watch the most recent series of Economic Update videos at: 1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global, 4) Gold & Silver Pt 1, 5) Gold & Silver Pt 2, 6) Gold & Silver Pt 3, 7) World Economic Update., 
World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, & 13) US Economic Update 2.