Last year was a nightmare for most investors. Despite the fact that the US stock market finished the year without any major changes, other stock markets around the world were bearish and volatile.
US stock indexes were volatile as well. In particular, S&P500 deviated by 300 points (9%). A rally was followed by a 22% decline, which in its turn was followed by a 20% rally.
The following factors contributed to such dynamics:
· The Japanese disasters (tsunamis, earthquakes, followed by the Fucushima-1 meltdown).
· The revolutions in Tunis, Egypt and other Arab states.
· The US credit rating cut.
· The eurozone crisis.
All those investors who think that after a prolonged period of shocks they will take a timeout in late 2012 will probably be disappointed. The problems haven’t disappeared and need to be solved.
What will happen to stock markets? Let answer this question.
Global Recession Keeps Escalating
The Market is always right. Therefore, multiple charts can help us to find out whether we will see another major crisis. The prospects of the global economy are ambiguous. However, they are bearish rather than bullish: the eurozone crisis, the US and Chinese economic slowdown, not to mention multiple geopolitical risks, especially in the Middle East. The British economy now seems to see a double recession. The Japanese economic recovery look exhausted.
USA: Poor Investment Opportunities
The US economy is seeing the lowest pace of growth in 2 years. Chances are we can see a further decline. The Federal Reserve ran out of fiscal stimuli in late 2011 while housing prices are still under pressure.
Despite the fact that the latest GDP report looks more reassuring (the GDP is expected to grow by 3% this year), it is important to abstain from focusing on the near-term prospects.
There are many extra risks:
1. The eurozone crisis is the biggest one. 20% of the US export comes to Europe. Obviously, the crisis affects the US economy.
2. Further fiscal toughening is another factor. The 2008 crisis shocked the US authorities. Therefore, the budget spending grew up to 10% of GDP. The authorities seem to be less loyal towards fiscal stimuli as the budget deficit keeps growing. Therefore, the US economic growth may decline by 2%.
According to , the global economy will continue slowing down in 2012. At this point, there is no point in implementing big-scale stimuli. The current market strength rests upon the expectations of further steps by the FRS and the ECB.
If the central banks fail to come up to the expectations, stock markets will start retracing down to their major levels of support. In order to initiate a major stock rally, the following steps are needed:
· The FRS should hit at QE3
· The ECB should go on with its promises as well
· Germany should back Mario Draghi’s offers
· China should implement several economic stimuli
· The eurozone should show at least faint signs of recovery
· The US demand should show some recovery as well
Therefore, investing in stock markets in the end of an economic cycle is a difficult task. Investors should go risk averse. Only safe haven assets are worth investing during such a period. It is necessary to avoid overheated economic sectors as the experts say the overall market looks extremely overbought.
According to , the materials and healthcare sectors of the US economy look relatively secure.
The stability of the US economic recovery is questionable. Over the last 12 months, the US budget deficit has already increased up to $1.2 trillion (8% of GDP).
Therefore, it is necessary to determine risky US economic sectors. These are:
