As is typical of our calendar-driven society, the new year lends an aura of hope for what is to come. The stock market rarely escapes the effects of this optimism, and this year was no different as the Dow surged 180 points today to close at 12,397. Stocks haven’t been this high since July of last year. It’s easy enough to worry that this one good day means the year might be spectacular and you’d better be on board lest you miss out. In fact, stocks are cheap, having discounted all sorts of desolate news over the last several years.
We expect investors to wrestle with two big questions in 2012: how steep will Europe’s recession be, and how will it affect the rest of the world? The consensus in the US seems to be that our economy will be dragged through the mud along with Europe, but as we’ve written before, that is not necessarily a foregone conclusion. Housing, for instance, is a distinctly native industry that depends little on what happens in Europe. We don’t export homes to Europe. If – and I admit it’s a big IF – housing were to at least stop getting worse next year and maybe improve a little, that would provide a much needed ballast for our economy.
If enough things go right or even just stay neutral in 2012, the consensus that currently links our economy to Europe’s may shift. If more investors begin to believe that the US will escape a Euro-induced recession, we could have a very good stock market in 2012, extending today’s Dow move.