A year ago there was widespread confidence that with the recession having ended in June, 2009, the economy continuing to recover, further QE2 easing underway, and the stock market clearly in a new bull market, that 2011 was going to be a great year.
In my annual forecast last December I agreed the year would be positive in the early months, but that the economy would begin to slow again once the effects of the Fed's QE2 program expired. I expected that would spook the stock market into a substantial correction during the market's often unfavorable summer months, and only after that correction would a subsequent rally produce the expected positive year.
And that's pretty much how it has worked out.
As we approach the new year this year, sentiment is just about opposite to a year ago. Gone is the confidence for both the economy and stock market, replaced by worries about the debt crisis in Europe, and the budget deficits and dysfunctional politicians in Washington.
The consensus expectations this year are for a serious recession in Europe that will drag the rest of the world, including the U.S., into a serious global recession, and that the U.S. stock market will roll over into its next bear market early next year on those fears.
Once again this year I disagree with the popular expectations.
Here's why.
After its first half slowdown this year, the U.S. economy has been in recovery mode and steadily gaining momentum. More importantly, unlike the recovery that was underway last fall, the economy is now recovering impressively on its own, without a boost from some sort of QE3 stimulus from the Fed.
It's also not just that so many economic reports have been coming in positive for several months now, nor even that most are soundly beating economists' forecasts. It's where the surprising improvements are taking place.
Historically, the two main driving forces of the economy in both directions have been the housing and auto industries. That makes sense since both have long coattails, taking so many other industries that supply them along for the ride, whether it's to the upside or downside.
And we're seeing home sales and new construction starts at multi-month highs, the inventory of unsold homes at multi-month lows.
Regarding the auto industry, it was reported this week that global auto sales and production are at record highs, fed by demand that was pent up during the Great Recession. And the recovering global car and truck market in the U.S. grew faster this year (9%) than in China (5%).
No wonder then that employment reports have been showing upside surprises for several months now, with new jobs creation up, the unemployment rate surprisingly declining, and new unemployment claims still falling as recently as last week.
Meanwhile, the Rockefeller Institute of Government reported that total tax revenues of 48 states in the U.S., have returned to pre-recession levels, a potential positive for the jobs picture going forward.
In order to produce the impressive improvements in overall jobs creation of recent months, new jobs being created in the private sector had to outweigh government lay-offs at the Federal, State, and Municipal levels. With state tax revenues recovered to pre-recession levels will that mean fewer lay-offs at the State level, perhaps even re-hiring to begin?
And then there is the potential progress being made on the Eurozone debt crisis.
The initial reaction to the new containment plan announced after the recent European Union summit meeting was skepticism, even derision. But as the details are being fleshed out, it is gaining some grudging recognition as having potential.
And this week the European Central Bank added to hopes with a surprise announcement.
For months the ECB has been talking tough, insisting that individual Eurozone governments had to impose tough austerity measures and bring their debt and deficits under control on their own, that the ECB wasn't going to bail them out with massive purchases of their bonds as markets had been hoping they would.
But on December 8 the bank announced it would offer unlimited, low-cost, three-year loans to European banks. It opened the vaults for the first wave on Wednesday and 523 banks showed up to borrow 489 billion euros ($640 billion), well above expectations.
The intention, or hope, is that European banks will use the money to buy the high-yielding bonds of Greece, Italy, Spain, etc., providing the troubled banks with the profit from the spread, while helping to alleviate the Eurozone debt crisis.
That ($640 billion) is a big chunk of money being thrown at the problem, and perhaps will alleviate some of the crisis of confidence in markets, by indicating that although talking tough, the ECB does have the Eurozone's back.
That was the approach taken by the U.S. Fed in its efforts to pull the U.S. out of the 2008 financial meltdown, talk tough but open the vaults.
These developments do raise the odds that the Eurozone debt crisis and a European recession will begin fading into the background after the first of the year, and allow markets to focus more on the U.S. economic recovery.
With that background, I am expecting a quite positive market next year, with only a minor pullback in the unfavorable season of the summer months
