Bullish on Stocks

More than once, when preparing for a trip to a colder region of the country, I hesitated before packing clothes warmer than what would be comfortable here in warmer San Diego. Even if I'd been there the week before, I struggled to imagine weather so different than what I was experiencing at the moment. It seems like our forecasts even for simple and obvious things tend to been rooted more in the status quo than in what is probable. 

That said, it does seem as though economic forecasters are finally beginning to imagine a 2012 that is different from 2011. I've already forecast the creation of 2 to 3 million jobs and a drop in unemployment to 7.5% or less. But there's more worth forecasting.

The car and housing markets will rebound simply because so many have been deferring buying a new car and getting their own place. Household debt has been paid down considerably in the last few years and people seem poised to buy. The ripple effects of this will do much to drive economic growth, job creation, and a rise in stock prices.

The bubble in gold will finally burst. Gold has so little intrinsic value that it is a waste of investment money anyway. Money put into real estate can help to build houses. Money put into stocks can help to expand businesses, create jobs, and fund R&D. The money put into gold is just a waste, and the gold bubble is likely to burst as anticipation of the apocalypse fades into the realization that the economy - after a lost decade - can, in fact, still behave normally. Most of gold's gains in the last decade have been based purely on speculation and Glen Beck ads.

Now is also a sweet time for real estate investment. Monthly costs on properties are incredibly low, given that property prices are so depressed at the same time that interest rates are so low. Look for an "unexpected" rise in real estate prices as soon as late this year, early next (2013). 

But I'm most optimistic about stocks. US stocks in particular. 

P/E ratios are low and consumption is down. If people are paying only $10 for every $1 of earnings now, think what will happen as higher sales increase profits (GM and Ford, for instance, are now retooled to become profitable at much lower production volumes than before) at the same time that optimism drives P/E ratios up. A rise in profits of, say, 20% coupled with a rise in P/E from about 11 to, say, 15 could mean a rise in indices in the tens of percent. 

Europe's economy may do better in 2012 (its companies in particular), but the Euro will probably still frighten investors. More money could move into American dollars and real estate (some) and stocks (mostly) seem like the best place to park money. That could add even more fuel to stock prices. 

The stock market seems mostly reflective of bad news now. And it is certainly possible that things will continue to stagnate. But the upside seems to be mostly ignored. Trillions of dollars are still sloshing about the globe in search of returns. It's probably a good idea to be positioned in stocks before that money comes rushing into the stock market than after it comes in.