First Half Of 2012 Promises Pain For Investors

MSN Money December 13, 2011

12/12/2011 7:59 PM ET

By Jim Jubak

The next 6 months promise much economic uncertainty and pain for investors. Here's how to make it through and cash in during a much-improved second half.

I'm worried -- make that very worried -- about the first half of 2012 for investors.

Why? Because the global economic picture looks very unfriendly to financial markets in the first six months of the year.

Not so much because the forecast for growth is so bad. In early December, economists surveyed by the Philadelphia Federal Reserve Bank projected that the U.S. economy would grow by 2.1% in the first half of 2012. That's a long way from a recession, but it's not enough growth to cut quickly into today's high unemployment rate.

Barclays is projecting that growth in China will slow to an annual rate of 7.8% in the first quarter of 2012, the quarter the investment bank is forecasting as the slowest of 2012. And even in the eurozone, the origin of the current global economic slowdown, the Organisation for Economic Co-operation and Development forecasts that growth will turn negative in the first part of 2012, but not by much. The end-of-November prediction of a 0.4% contraction in the first quarter of the year would amount to just a mild recession.

Not the best of times, certainly, but not exactly a replay of 2008, either. So why am I so worried?

Because stock market history argues that the correlation of the magnitude of economic growth and stock prices is not all that strong. More important are the direction of change in rates of economic growth and the degree of uncertainty about future growth rates. On both those two measures -- direction of change and uncertainty -- the first half of 2012 scores as a very worrisome period.

Jim Jubak

Let me start with China to show you what I mean. Growth in China is key to demand for global commodities such as iron ore, copper, coal and oil, and for demand for goods and services that range from Coach (COH, news) bags to Maxwell Technologies (MXWL, news) ultracapacitors to Ctrip.com International (CTRP, news) travel bookings and HSBC (HBC, news) investment banking services.

So what will the growth rate for China's economy be in 2012?

Even looking at a fairly optimistic forecast like that from Barclays, the direction of the trend isn't comforting. Barclays calls for growth in the Chinese economy to slow from an annual rate of 9.1% in the third quarter of 2011 to 8.3% in the fourth quarter of 2011 to 7.8% in the first quarter of 2012.

And the conviction in any call on China's growth rate is fairly low. Which means, to look at it the other way around, the uncertainty is fairly high.

I have a sense that any of these projections is only provisional and that analysts are still rushing to play catch-up with events. Barclays has cut its forecast for all of 2012 to 8.1% from 8.4%. Morgan Stanley has cut its forecast to 8.4% from 8.9%. But you don't have to look far to find more bearish forecasts.

And even those provisional forecasts are coming with more caveats. The Morgan Stanley forecast, for example, is for a most likely scenario resulting in 8.4% growth. There's also a bearish scenario resulting in a drop to 7.7% growth for 2012.

Thank Europe for the doubts

The uncertainty in forecasts for China, the United States and the global economy as a whole largely stems from uncertainty over the depth of the slowdown in the eurozone. The lower the growth in the eurozone, the lower growth is likely to be in the countries that trade with that group of nations.

The European Central Bank captured that high uncertainty in the forecast for 2012 growth issued by its economists on Dec. 8. The bank said that for 2012, growth in the eurozone would fall between 1% -- weak growth -- and a negative 0.4% -- a mild recession.

Compare that with the last forecast from the bank's economists, which looked for growth in 2012 of somewhere between 2.2% and 0.4%. On the numbers, you could say that the degree of uncertainty is lower in the latest call -- the difference between the high and low ends of the forecasts has diminished to a 1.4 percentage point spread from the prior 1.8 percentage point spread. But I'd argue that from an investor's point of view, the uncertainty has actually increased since the difference between high and low forecasts is now the difference between mild growth and mild recession instead of between solid growth and mild growth.

With the trend pointing downward, investors can be forgiven for thinking that the next set of forecasts won't show a median of 0.3% growth for 2012 but a solidly negative forecast for the year.

And the recently announced grand plan to save the euro (is it Grand Plan No. 3 or No. 4? I've lost count) concentrates the risk in the first half of 2012. Even if you take European leaders' timetable as accurate (I wouldn't, but you can if you like), the permanent European Stabilization Mechanism, with its 500 billion euros in bailout funding, isn't set to go into operation until July. Nobody knows how long it will take the International Monetary Fund to get its promised 200 billion euros in new funding into position -- and nobody knows exactly what the IMF will do with that funding in support of eurozone bond markets and eurozone governments.

Latest on the euro crisis

What we do know is that the first quarter is loaded with funding needs. The Royal Bank of Scotland calculates that eurozone governments will need to sell 824 billion euros in debt in 2012, and that 225 billion of that will need to be raised in the first quarter of 2012. That's not the end of the eurozone's calls on the financial markets, either. Agencies and supranational bodies such as the temporary European Financial Stability Facility -- the bailout fund that is selling bonds to support Greece, Ireland and Portugal -- will have to issue 175 billion euros in debt in the first quarter. As much as 45 billion of that is needed for Ireland, Portugal and Greece.

Think any of this will be an easy sell in early 2012?

Especially not if, as many European constitutional experts now worry, the plan to fix the long-term problems of the euro through a new treaty, with somewhere between 17 and 26 signatories, faces a legal challenge. It's not clear that a group that is not the European Union -- and since the United Kingdom has rejected this approach, the proposed new treaty won't include all members of the European Union -- can utilize European Union bodies, such as the European Commission and the European Court of Justice, to enforce the budget mechanisms envisioned in the planned treaty, which was backed with such fervor by German Chancellor Angela Merkel. At the least, these doubts will hang over the treaty effort as it slowly advances through summit meeting after summit meeting.

Continued: You can't blame it all on euros, though Single page12Next >RELATED ARTICLESJubak on video: Borrowing surge may not be bullishThe week ahead: Don't give up on stocks just yetJohn Mauldin: How long can the world avoid crisis?Why China is all that matters - 1 - how to invest - MSN MoneyThe coming global financial crisis - 1 - politics and the global ...If Greece defaults . . . then what? - 1 - global economy - MSN MoneyVIDEO ON MSN MONEY/* /**/ var scp_UserRating=-1; down_arrow_hover= new Image(); down_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_hover.gif'; down_arrow_normal= new Image(); down_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_normal.gif'; up_arrow_hover= new Image(); up_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_hover.gif'; up_arrow_normal= new Image(); up_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_normal.gif'; var scp_thankyoutext = 'Thank you!'; var scp_thankyoualttext = 'You have voted on this'; var scp_votestext = '{0} votes'; var scp_votescount = 38; var scp_errmsg = 'Errors occured while saving your rating. 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Mail"},"omniAccount":"MSNPORTALSCP","ratingsControlId":"ratCntrlBinary","ratingsItemId":"scp:bbcdiscussion:f24978f9-29b2-449e-a349-1364ca3cdbb1","appUri":"http://social.msn.com/boards","pageUrl":"http://money.msn.com/investment-advice/how-to-save-your-portfolio-from-2012-jubak.aspx","ratingTags":["00120065-0000-0000-0000-000000000000","00000065-02a6-0000-0000-000000000000","ART"],"fblkShow":true,"fblkAppId":"","fblkRef":"","fblkTrkName":"","fblkTrkVal":"","twtShow":true,"twtTrkName":"","twtTrkVal":""}); }); /**/ 9CommentsNewestOldestBestWorstControversialhungry4food2 hours ago Obama's dream of nationalization of the USA is here ....

Iran army declines comment on MP's Hormuz exercise remarks , this is the same thing as rejecting the US Dollar as the Petrol Dollar currency for OIL , so this will create the Nationalization of the US Energy markets and stopping 2012 election .

http://news.yahoo.com/iran-army-declines-mps-hormuz-exercise-remarks-132115297.html

http://www.scotsman.com/news/international/military_to_practise_blocking_straits_of_hormuz_1_2005512

Now the above action will result in destabilizing the civilian society of the USA and so we now can see why this is being enacted ;

To the types of Americans labeled as “terrorists” by the Obama regime US Senator Rand Paul this past week warned included anyone having missing fingers, anyone having guns, anyone having weatherproofed ammunition, and anyone having seven days or more of food in their homes. [See video HERE.] http://www.youtube.com/watch?v=iD1T61oTrR8&feature=player_embedded 4 7ReportSpamWorking Monday4 hours agoWhen the ECU sovereign funds 'go broke'......then those with capital will buy, buy, buy European assets for pennies on the dollar/euro. Next year is a time of waiting for Euro spenders to be at the mercy of buyers! 4 1ReportSpamLynn X4 hours agoI had a HSBC credit card, Household Bank, only $ 5000.00 limit and I have perfect credit. I have other cards with much higher limits and great rewards for using them namely "Bank of America World Points", my favorite. One day Household Bank sent me a letter saying my credit limit was being cut to $ 300.00. I called the number on the card and a man in India told me there had been a massive mistake and the line would be restored to $ 5,000.00. so I went along with that. Two months later I got another letter saying my credit limit was being cut to $ 300.00. This time I was not going to fool around with this nonsense any more so I called the number on the card, getting a man in India and told him to cancel the card permanently. I don't need a credit card from a bank that doesn't know what they are doing. 7 2ReportSpamJokster_C5 hours agoThis kind of article is completely moot. First of all, today's economy and stocks run on a much more volatile scale then ever before. This kind of forecasting is always completely off basis, simply because the markets are still extremely volatile. Just remember folks, just because Jubak says something will happen, like he said 2011 was going to be a bad year and it ended up being an overall great year, does not mean you need to panic and run for the hills like he does at every single moment he gets. Simply put, stop spreading panic rumors without any truly firm basis, we all know that you'll get your **** handed to you in the process just like in your 2011 predictions failure. 13 9ReportSpamonebondedout6 hours agoSome people say a man is made outta mudA poor man's made outta muscle and bloodMuscle and blood and skin and bonesA mind that's a-weak and a back that's strongYou load sixteen tons, what do you getAnother day older and deeper in debtSaint Peter don't you call me 'cause I can't goI owe my soul to the company storeI was born one mornin' when the sun didn't shineI picked up my shovel and I walked to the mineI loaded sixteen tons of number nine coalAnd the straw boss said "Well, a-bless my soul"You load sixteen tons, what do you getAnother day older and deeper in debtSaint Peter don't you call me 'cause I can't goI owe my soul to the company storeI was born one mornin', it was drizzlin' rainFightin' and trouble are my middle nameI was raised in the canebrake by an ol' mama lionCain't no-a high-toned woman make me walk the lineYou load sixteen tons, what do you getAnother day older and deeper in debtSaint Peter don't you call me 'cause I can't goI owe my soul to the company storeIf you see me comin', better step asideA lotta men didn't, a lotta men diedOne fist of iron, the other of steelIf the right one don't a-get youThen the left one willYou load sixteen tons, what do you getAnother day older and deeper in debtSaint Peter don't you call me 'cause I can't goI owe my soul to the company store 14 5ReportSpamFinal Word7 hours agoThis reminds me of one who thinks his/her hands are fixed on a crystal ball. So many things change from day-to-day that this kind of speculation is in question of what really will happen, But I can say this, the market needs both insight and very much oversight to make it work for the average investor. 19 2ReportSpamDoug (Out in the cold) 16 hours agoIf our dysfunctional Congress don't pass a budget by Friday .. does that mean that the second half of December 2011 .. the stock markets are going to be exceeding terminal velocity on the way down? 17 2ReportSpamhavasu4616 hours agoIt's not as if the eurozone is the only source of uncertainty for the first half of 2012. In the United States, it increasingly looks as if congressional gridlock will allow even the modest economic stimulus from reductions in the Social Security withholding tax to expire at the end of the year

That's a good thing. We need to see if the US economy can start to perform without creating more long term debt or we'll in up following the EU down the drain. Cutting SS taxes to buy more gas is not a good stimulus. I agree with most of your speculation but if you've been accumulating stocks over the past 6 month that yield 4-7% then you'll be OK. You may have to suffer some paper losses. Analysts and market gurus want you to trade on FUD to create volatility from which they derive profits.

20 6ReportSpambox00717 hours ago

Mr. Jim Jubak,

generally I like your articles.

Here is a topic for you to ask everyone else:

"the more I work the more I owe the Fed and the less I work the more the Fed owes me"

Phrase it better in a way that people will express a Yeah or Neah on paying taxes. Good luck!

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