- What if Europe gets worse? No matter how much investors might desire it, Europe's economic mess just won't go away. But the big fear is that it will deteriorate even more before it gets better.
- What if U.S. housing finally improves? It's now close to five years since the housing bubble burst. When it rebounds isn't only an investment question, but of vital importance to households as well.
- What if the jobs recovery falters? The long-awaited jobs recovery seems to have arrived. The unemployment rate has dropped steadily, albeit slowly, from 9.1% in August to 8.5% in December. The big question: Can it be sustained?
- What if there's another budget crisis? Last summer, investors watched in horror as Congress wrestled over the government's finances. They even risked the first-ever default on U.S. debt.
- What if China's economy heats up? China's economy matters because it's the second largest in the world. Over the past decade, the communist country has grown fast, but lately it has been cooling off. The question is: What happens when it heats up again?
Sunday, January 22, 2012
Simon Constable
... Yes, there are some mammoth-sized unknowns out there that could hurt your returns. But when the biggest "what ifs" are resolved, you could also profit, if you play it right.
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"How to Play the Five Big 'What Ifs' of 2012"
ReplyDeleteby Simon Constable
http://online.wsj.com/article/SB10001424052970204468004577166810581681478.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsSecond
When it comes to investing, 2012 isn't the year to do nothing and just hope for the best.
ReplyDeleteYes, there are some mammoth-sized unknowns out there that could hurt your returns. But when the biggest "what ifs" are resolved, you could also profit, if you play it right.
Here's how to tackle the five scenarios that are keeping Wall Street investors awake at night:
1 What if Europe gets worse?
No matter how much investors might desire it, Europe's economic mess just won't go away. But the big fear is that it will deteriorate even more before it gets better.
"Europe getting worse is a disaster for everything but the safest investments," says Milton Ezrati, market strategist at Jersey City, N.J.-based money-management firm Lord Abbett.
You'll know Europe's economy is imploding if you see the value of the euro fall much further. Currently, one euro buys approximately $1.29, down from $1.48 in May.
If it does get worse, then all assets will do poorly except U.S. Treasurys, U.S. government agency debt and the highest-quality corporate debt, Mr. Ezrati says.
In simpler terms, stay in investments denominated in U.S. dollars and away from those in euros or British pounds. Britain isn't part of the euro zone, but it does more business with Europe than with any other region. So a recession in Europe would hit the pound hard.
All European stock markets will likely fare poorly: If you must stay in European stocks, then Germany's stock market would be "the least worst," he says.
He adds: European stocks could look really cheap in 12 to 18 months. So savvy investors will be wise to keep some cash on the sidelines.
2 What if U.S. housing finally improves?
It's now close to five years since the housing bubble burst. When it rebounds isn't only an investment question, but of vital importance to households as well.
You'll know real estate is improving when you see rising prices in combination with greater sales volumes of housing units. For that to occur, "lots of other good things need to be happening," says Barry Ritholtz, CEO of FusionIQ, a New York-based research and asset-management company.
Notably, he says, look for a better jobs picture, with an increase in average wages. You'll also need to see people who had been living with their parents for financial reasons finally getting their own home, either buying or renting.
That would lead to an increase in so-called household formation, a vital factor for a housing recovery.
If all those things are happening, then, Mr. Ritholtz says, savvy investors will be looking beyond the obvious investment choices of home-building stocks. Instead, he says, look to companies that will prosper from an improved labor market, such as staffing firm Robert Half International (RHI), payroll processor ADP (ADP) and jobs-listing service Monster Worldwide (MWW).
3 What if the jobs recovery falters?
ReplyDeleteThe long-awaited jobs recovery seems to have arrived. The unemployment rate has dropped steadily, albeit slowly, from 9.1% in August to 8.5% in December.
The big question: Can it be sustained?
If things start going backward, then "basic support for U.S. stocks will be undermined," says Art Hogan, head of product strategy at New York-based Lazard Capital Markets. "It will do an awful lot of damage to investor confidence."
You'll know the jobs recovery is in reverse by watching the unemployment claims data (released Thursdays) and the Department of Labor employment report (the first Friday of each month).
Specifically, watch for a higher unemployment rate and climbing first-time claims for unemployment insurance.
If the jobs market does falter, then stocks of companies that sell consumer staples, such as soap and food, could benefit, he says. In addition, pharmaceutical companies and electric utilities, also providers of essentials, will tend to do well, he says. You can get a basket of such stocks by purchasing the Consumer Staples Select Sector SPDR (XLP) exchange-traded fund.
4 What if there's another budget crisis?
Last summer, investors watched in horror as Congress wrestled over the government's finances. They even risked the first-ever default on U.S. debt.
Although no one wants it, a repeat performance is possible at year-end. Why? The Bush-era tax cuts are set to expire (again). Unless one party claims a decisive victory across Capitol Hill in November's election, then there will be a wrangle over whether to extend some or all of the tax cuts into 2013.
"It's always a shaky prospect when you put the fate of the U.S. economy in the hands of congressional leaders," says Ellen Zentner, senior U.S. economist at Nomura Securities in New York.
The problem: Massive uncertainty over the outcome.The bigger the differences between the two sides, the worse it will be for investors. Ms. Zentner says an impasse could cause wild swings in the stock market and the economy. So if Congress looks like it's headed for another blockbuster fight, stay safe in cash and avoid the potential gyrations of stocks.
5 What if China's economy heats up?
China's economy matters because it's the second largest in the world. Over the past decade, the communist country has grown fast, but lately it has been cooling off. The question is: What happens when it heats up again?
"As China grows so does the use of commodities," says Michael Woolfolk, senior currency strategist at BNY Mellon in New York. Specifically, he points to industrial minerals such as iron ore and copper, which are used in construction and manufacturing.
You'll know China's economy is doing better if you see a sustained rise in Chinese output. Look for gross-domestic-product growth to jump back to the double digits, from its "slow rate" of 8.9% at the end of 2011.
Many observers doubt the value of Chinese economic data. "Just take it at face value," Mr. Woolfolk says, since the trends in the data are more important.
Stocks that would likely do well include industrial miners Vale (VALE), Rio Tinto (RIO), BHP Billiton (BHP) and Freeport-McMoRan Copper & Gold (FCX).
Those investors not wanting to pick stocks might consider a specialized mutual fund, such as the $3.9 billion Vanguard Precious Metals and Mining fund (VGPMX).