Welcome to the summer of 2012, investors. The U.S. markets, like the weather, have been strangely moody — with sudden storms, drought conditions and an overall sense of uncertainty clouding the landscape.
For the third straight year, stock markets began the year with healthy gains only to decline on fears of a global economic slowdown, say analysts with T. Rowe Price Investment Services in a summer outlook published Wednesday.
Nevertheless, the T. Rowe analysts say, the total return of the S&P 500 Index was up 9.49%, which put the U.S. markets well ahead of the international markets.
"The solid U.S. gain testified to the slow but sustained recovery of the American economy, given that markets faced significant obstacles," according to the report, which notes that the continuing eurozone crisis, slowing Chinese growth and the looming U.S. fiscal cliff have meant no end to the "risk on, risk off" trade as the third quarter begins.
So what's an investor to do in the summer of 2012? Here's what the experts at T. Rowe Price say:
Fiscal Cliff Diving, Anybody?
Investors this summer are seeking solid ground despite the United States' economic struggles. While there is optimism that the slow expansion is intact, according to T. Rowe Price Chief Economist Alan Levenson, U.S. policymakers must refrain from jumping off the "fiscal cliff" and seek broader fiscal reforms. Certainly, this will become a more pressing issue as summer gives way to fall even with the ray of hope from the spending deal announced Tuesday.
The fiscal cliff of tax increases and spending cuts scheduled to take effect as of Jan. 1 are a major source of uncertainty for the U.S. outlook, writes Levenson, who anticipates that the U.S. housing headwind has not entirely subsided and should keep real GDP growth in a 2.0% to 2.5% range through next year. But Congress' failure to act on tax and spending cuts would amount to a fiscal tightening of about 3% of GDP, he warns.
"Policymakers are aware that such a blow could well tip the economy back into recession. We—like most forecasters—assume that about half of the force of these measures will be deferred into 2013. An additional 12-month extension of the Bush-era tax cuts would fit this bill. Alternatively, an extension of just the middle-income tax cuts and a deferral of the super committee budget sequestration would have a similar impact," Levenson writes.
Jumping on the U.S. Energy Wave.
A wave of improved natural gas and oil extraction has given rise to a seismic shift in U.S. energy production, says Tim Parker, T. Rowe Price's natural resource stock portfolio manager, in this short video.
"Manufacturing companies have in the past few decades felt that they were working at a cost disadvantage relative to the rest of the world. Now, because prices are so cheap in the U.S., with gas being so cheap and oil cheaper than average, they're at an advantaged cost position," Parker says.
Environmental concerns aside, fracking has resulted in a substantial pickup in natural gas and, increasingly, oil production, he notes. For example, U.S. natural gas supply skyrocketed 12% year over year in January. But demand has grown at only about 1% per year, and this means that consumers as well as industrial companies are now benefiting from lower energy costs.
For investors, lower prices may challenge energy producers, but they also should create the following opportunities, according to Parker:
- Energy producers that maintain low operating costs or find new reserves are still attractive.
- Chemical and paint companies using natural gas-linked hydrocarbon inputs may have a cost advantage over global companies using oil-linked hydrocarbons.
- Heavy energy users, such as metal fabrication and steel production companies, also are attractive.
Summertime Sanctuary in U.S. Stocks.
Dipping a Toe in Bonds' Murky Waters. 
Shiny, Happy Muni Bonds.
