I’ve read about 3000 blog posts and news articles this year, scanned three times that many, closely parsed 200-400 research reports and spent the remainder of the hours between 7:30am and 6:00pm in search of other sources of information. The fact that the S&P 500 stands almost exactly at the same level as in January implies that the majority of this effort, intellectually stimulating as it may have been, has been a waste of time. We have spent almost 12 entire months chasing our tails, jumping at economic shadows only to find ourselves in the exact same place we started.
A cursory review of asset prices in 2011 provides a reasonably simple lesson for next year – assess the scenario the market is priced for and the probability of its accuracy. This year the Q1 sell-side consensus view was, as usual, a second half growth ramp-up which, to be fair, was reasonably accurate in term of US data. Equity values melted up accordingly in Q2 until the recovery was largely priced in despite intensifying credit pressures in Europe. By mid-year, European credit data put the second half growth thesis on extremely shaky ground and it was not a difficult decision, with the precedent of 2007 in recent memory, to avoid getting aggressive for the remainder of the year.
200-page “Outlook 2012” research reports will begin to ooze out in publication shortly. As Josh Brown recently pointed out, the default position of “second half recovery” will no doubt be in full effect. Personally, I will be watching for extrapolation of current corporate earnings growth trends. Aggregate profits have been remarkably resilient while the market has been focused on macro factors and this will likely result in some early-year table pounding from analysts and strategists. This could, however, set us up for a vicious whipsaw. Global credit problems and the ongoing slowdown in merging markets growth levels imply a rapid, sudden slowdown in corporate capex during Q4, reflecting a declining number of opportunities for investment in expansion. Falling capex means falling aggregate profits so, in the end, if the sell side is successful in getting profit growth at current levels priced in to equities, I will be looking for shorts.
All of this is subject to change with little notice. My real hope for 2012 is for an actual trend to arise so that it does not turn out to be the giant waste of time 2011 was. Years like this make us all look stupid, spilling oceans of virtual ink on commentary, implementing billions of dollars borrowed for higher education in biz school or economics only to, in terms of equity prices, run around in circles. This reminder that the finance and investing industries really don’t do anything tangible, just determine the monetary value of efforts by others in the real world, is unwelcome.