The following is excerpted from an article that ran in The Birmingham News on January 8, 2012. For the roundtable article, reporter Roy Williams interviewed several financial advisors including BCR Wealth's Norman Berk. We wanted to share his outlook with you for the coming year.
Q: Share your thoughts on the state of the stock market for 2012.
A: Stock market performance does not always conform to economic performance. Most investors think there is a direct relationship between how a company performs and how it's stock performs. This is really not true. Often, a company does well by increasing its net earnings yet it's stock does not reflect this growth. Think of economic performance as the brick and mortar, sales, payroll, product or service and the stock market as a derivative, it is what people think will happen. In many ways stock market analysis is, in the end, star gazing.
I think we will see a positive market for 2012. Many economists and stock analysts predict a 2-4% growth in Gross Domestic Product for 2012. I think we will have stock market growth, measured by the major indices, greater than that. I think we are in position that for various psychological reasons, the stock market can be viewed as underperforming the economy and 2012 may be the year parity is achieved. According to Bloomberg projections, the S & P Industrials will grow at over 18% in 2012 yet the corresponding index is selling at 12.6 times the earnings estimates. This is a time, 2012 or perhaps slightly later, that calls for growth in stock prices.
Based upon news reports and the current deluge of political talk, it is easy to think our national economy is sinking and sinking fast. Not true. The US is the world's largest manufacturer at the same global market share it has held for the last 30 years. Our manufacturing sector is currently leading the US economy. The number of US manufacturing jobs has decreased in the last ten years but our workers are twice as productive as those workers in the next ten leading manufacturing economies.
Q: What do you see as the biggest strengths that could help U.S. stocks this year?
A: We are not Europe and we are not China. We alone maintain the trust and financial strength in the world, witness the surge in sales of US Treasury securities backed by the full faith and credit of our country even while paying such low rates.
Q: What do you see as the biggest weaknesses that could hurt the U.S. stock market?
A: The fear generated by the politicians and the talking heads scaring the public into believing we are in terrible financial condition. Things are not great, but neither are they as terrible as some public figures claim.
Q: What impact could the fall presidential election in November have on the stock market - how would a re-election of President Obama affect the market vs. election of a Republican?
A: The election may turn on whether the public wants a larger government using a Keynesian economic concept of spending to grow the economy or what has become known as a Regan type of smaller government concerned with debt and low taxes as opposed to providing services.
Good arguments can be made for both sides of the issue but we do have the chance to decide as a nation. Each major political party has been associated with one of these positions and each are demonizing the other. I think the stock market will be affected prior to November, actually every time there is another gridlock type fight in Congress. The more there is an impasse, the more the uncertainty, the more the financial markets will fluctuate.
Q: What is your advice for investors as of January 2012?
A: Taking a long-term approach to investing, managing your risk, diversifying your portfolio into all parts of the global economy and then diversifyingwithin each asset class; purchasing high-quality, low-cost investments and holding them without frequent trading, is the surest way to invest successfully. Once you have established your portfolio, reviewing and trading back to your asset allocation is critical to maintain your risk profile and growth opportunities.
No one has ever been able to consistently predict which stocks will be winners so it is important to diversify so that whatever does well wherever it is, is either in your portfolio or another similar stock is.