With advisors struggling daily to keep up with current events in the European debt crisis, they continue to assess what these changes will do to their clients' portfolios.
An understanding of where the global markets are headed in 2012 will certainly help nervous investors decide where to put their money. As a result, just about every economic commentator is focused on Europe (not to mention the U.S. budget mess in Washington) in year-end outlooks for 2012.
So where exactly is the troubled eurozone headed? The honest answer is that nobody really knows, which explains why analysts and market participants are watching the news out of Europe so closely. For the moment, the Federal Reserve has joined with five other central banks to lower the cost of dollar funding and the European Central Bank has dropped its key interest rate and is planning to lend banks as much money as they need for the next three years.
Looking ahead to 2012, market strategists and portfolio managers are combing through the data in a search for investment opportunities next year. Here's what the experts are saying:
J.P. Morgan Funds Chief Market Strategist David Kelly (left) said in a Nov. 29 conference call that Europe "is very far from the end game," and more recently, in a Dec. 5 note, wrote that stocks generally look cheap around the world and U.S. Treasuries, Japanese government bonds and German Bunds look expensive. Not surprisingly, Kelly is overweight equities and underweight fixed income.
Throughout this year, he wrote, markets have been volatile in response to two extremes: "an extreme in valuations and an extreme in uncertainty."
Kelly didn't fail to mention on the call that even as Europe is struggling, the United States is bringing its own problems of political economy to the investment table. "The single biggest threat to the U.S. economy is the decisions that Congress needs to make before the end of the year," he said.
While current events may provide an opportunity for long-term investors, it is important to remain balanced for a number of reasons, Kelly wrote: "First, with growth apparently turning negative in Europe and slowing down in emerging markets, the global economy is losing steam. In such a situation, it is never clear quite where the bottom is. Second, while policy-makers in Europe and the U.S. have the opportunity to make some good decisions over the next two weeks they certainly also have the opportunity to make further bad ones."
Even though there has been a pickup in the United States, companies in fourth-quarter 2011 have faced headwinds from a slowdown in global economies, some in the emerging markets but especially Europe. The U.S. dollar is higher, driving inflation up in the States and hurting foreign profits, said Kelly, adding that U.S. stocks are decoupling from European stocks.
"Going into 2012, we need to reassure investors with the things that we know how to reassure them about," Kelly said on the call. "But people should not head for cash. Cash is paying them zero, and it will cost them in the long run."
LPL Financial Chief Market Strategist Jeff Kleintop believes that the European debt dilemma and the U.S. presidential elections will hold "meaningful consequences" for investors in 2012.
