Stocks started off with a bang in 2012, with most indexes (see below) posting their best January return in 15 years. As the economy continues to heal (albeit slowly), one might wonder if the uptrend that started in the fourth quarter will continue.
From a fundamental point of view, it should. Corporate earnings continue to impress, as companies are still largely beating estimates. Interest rates are low, and will likely (according to the Fed) stay that way for the next few years—which would appease the concerns of those looking to refinance debt. Durable goods orders have also been healthy, rising 3% in December following a 4.3% in the prior month. Amid these positive developments, equity valuations remain at firmly depressed levels.
But don’t expect a yellow brick road path for stocks this year. The negative karma surrounding the world’s economy—which includes worries over the EU, the domestic housing market, and the sustainability of the current recovery—makes it tough to imagine that stocks will continue to defy gravity. I do expect stocks to end the year higher, but the path will once again be circuitous. Those without a long-term view and an eye for diversification may have issues holding onto the bucking bull in 2012.