A lot of people have been drawing parallels between 2012 and 2011, which can be seen as a bad thing thing because stocks peaked in April then tanked in the second half of the year.
BlackRock’s Bob Doll sums up some of the similarities.
There are some aspects of the financial and economic backdrop that do look similar between the two years. In addition to the flare ups in Europe regarding debt problems, we are currently in the midst of a period of rising energy prices. Gasoline prices in particular are getting close to last year’s peaks. We are also seeing some renewed weakness in the economic data—the pace of jobs growth slowed in March and consumer confidence levels have been looking softer. Should gasoline prices continue to rise, it would be reasonable to fear that the spillover effect onto the rest of the economy would worsen.
Despite the similarities, Doll warns investors that 2012 is certainly different.
We believe it would be a mistake, however, to look too closely to 2011 as a model for what might happen this year. For starters, current expectations for both the economy and the markets are worse than they were at this point last year. In early 2011, investors were pricing in a better economic environment than what would ultimately come to pass. In contrast, at this point we believe that markets are already priced for relatively modest levels of growth, suggesting that there is less room for downside disappointments. Additionally, the fundamental strength of the economy is better now than it was one year ago. Notwithstanding last month’s data, the labour market is stronger than it was, housing appears to be bottoming and US credit conditions have been improving. Finally, it is important to remember that the recovery and market strength last year were, to some extent, derailed by the natural disasters in Japan and by S&P’s credit downgrade of the United States. While external shocks are always a risk, we can hope that these sorts of factors will not be repeated.
Doll says investors shouldn’t be surprised to see a 5 to 7 per cent correction in stocks. But he remains bullish.
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