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Investing in 2012

Although the December rally seems to have stalled just above S&P 1250 (not far from where we started 2011,) there’s been a nice rally  in some big cap recession resistant stocks like food (e.g. Kraft, General Mills,) and drug stocks (e.g. Abbott Labs and Pfizer.)

Some big retailer rallied into the end of the year while others flattened out after the early December lift from the November lows. Tech also flattened out while oil and gas stocks, although not as strong as food and drugs, did pretty well by Santa.

The big market issues facing us in the New Year continue to be:

• Will Europe’s continued incremental support of its banks and sovereign debt prevent the Eurozone from unwinding.
• Will some important economies, like the U.S. and China, continue to grow, however slowly, even if Europe goes into recession.

My view is that Europe doesn’t get enough credit in the U.S. financial press for what they have done already to stabilize thier financial system. I believe they will continue to work on it in their slow, incremental way, and the Euro will still be one of the world’s top currencies at the end of 2012.

In the U.S. the job picture doesn’t look much better going into the New Year than it has been in most of 2011, but there are consistent signs of growth in several of the recently announced economic stats, especially manufacturing.

The U.S. consumer came alive in the 4th quarter, although it’s not clear that will continue into 2012. People are still paying down debt and not optimistic about their home values. Most analysts expect the Fed to maintain an easy monetary policy through 2012, as do I.

Europe is China’s largest end market, so if Europe slows down so will China. Too, the property boom in China shows signs of slowing. However, few analysts expect China’s growth rate to slow to the point where it’s a problem, as long as the U.S., China’s second largest export market, avoids recession.

So, global recession concerns and Euro problems balanced by an easy Fed and some U.S. growth seems to be already reflected in stock (and bond) prices, and I don’t see much changing in 2012.

What to do? Dividend yield on stocks bought on market or sector pullbacks have the best chance of providing positive returns in this coming year’s probable environment. The stock groups mentioned above, food, drugs, energy,  would be the first place to look. 

Bonds, having  priced in Fed Policy and a slow economy, offer little return potential in 2012, although they are still an important asset class for diversification.

Some selected short and intermediate term high grade corporate bonds in the banking and deep cyclical sectors, as well as selected muni’s, may offer good entries during the year for both decent yield and some appreciation.

Gold? Hold it if you own it. Buy it on dips if you don’t own enough (5-10% of your investments.)

As always, stops are important, cash is not trash, and stay diversified.

Happy New Year