How 2012 Will Unfold - Maybe!

Last week I was invited to take part in a survey of financial experts to determine their views on specific issues for this year. The results will be released at the World Money Show in Orlando in February.

Whenever I'm asked to participate in surveys like this, I take time to carefully think through my answers to the questions because the results will sometimes influence investor behaviour, perhaps significantly.

Each question offered the choice of several possible answers. Here are my responses, with the rationale for each. Try it yourself - you may be surprised at some of your own answers and what they reveal about your view of the near-term future.

Question 1 - Over the next 12 months, I think the Standard & Poor's 500 average will:

1. Rise 10% or more (I am very bullish)
   
   
2. Rise less than 10% (I am somewhat bullish)
   
   
3. Remain about the same (I am neutral)
   
   
4. Fall less than 10% (I am somewhat bearish)
   
   
5. Fall more than 10% (I am very bearish)

My response: Rise less than 10% (I am somewhat bullish). We are almost through January and I still feel the same as I did at the time I wrote my outlook column at the start of the month. I said then that I expected the S&P 500 to finish the year at around 1,350, which would represent an increase of 7.4% over its 2011 finish. If anything, I may be too bearish - the index is already closing on my 2012 target, finishing the week at 1,316. But I'm dubious as to whether the January rally can be sustained, given the headwinds that are coming. So I'm sticking with the less than 10% response.

Question 2 - Over the next 12 months, I expect the inflation rate as measured by the Consumer Price Index to:

1. Increase to 3% or more
   
   
2. Increase to between 1% and 3%
   
   
3. Remain about the same
   
   
4. Decrease to between 0% and 1%
   
   
5. Go negative (deflation)

My response: Remain about the same. This is actually a poorly-worded question. As of the end of December, the annualized inflation rate in the U.S. was 3% so options a) and b) are invalid. Notwithstanding that, I don't expect to see much movement in the overall U.S. inflation rate this year because I believe that countervailing forces will offset one another. High oil prices and a slow but gradual recovery in the housing market will exert upward pressure on the CPI. But weak economic growth will force retailers to keep prices low and should keep the costs of most commodities in check.

Question 3 - Over the next 12 months, I expect the Federal Reserve to:

1. Raise interest rates and end monetary stimulus
   
   
2. Keep rates where they are and end monetary stimulus
   
   
3. Keep rates where they are and maintain or increase monetary stimulus

My response: Keep rates where they are and maintain or increase monetary stimulus. I answered the survey before the Fed announced on Wednesday that it expects to keep interest rates at their current historic lows until at least the end of 2014. That kind of long-term commitment is extraordinary, to say the least, and it clearly shows how concerned the governors are about the health of the American economy. If conditions don't improve soon, look for another round of quantitative easing (QE3) in the spring. That would push the loonie higher, as did the Wednesday announcement.

Question 4 - I expect the unemployment rate to end 2012 at:

1. Less than 7%
   
   
2. Between 7% and 8%
   
   
3. Between 8% and 9%
   
   
4. Above 9%

My response: Between 8% and 9%. Remember we are talking about U.S. unemployment rates here, which are higher than ours. As of the end of December, the official rate south of the border stood at 8.5% whereas Canada was a point lower, at 7.5%. We may see some modest improvement in the American situation this year but given the slow growth forecast a drop to below 8% doesn't seem feasible.

Question 5 - I expect the housing market to bottom:

1. Sometime in 2012
   
   
2. After 2012
   
   
3. It has bottomed already

My response: Sometime in 2012. This was a toss-up between a) and c). Just as nothing goes up forever, nothing goes down forever. The inventory of new homes for sale has been steadily declining for more than a year. As supply tightens, prices will start to firm. Low interest rates should also stimulate home buying.

Question 6 - What do you think will happen in the U.S. economy in 2012?

1. GDP will continue to grow at a modest pace (below 3%)
   
   
2. GDP growth will pick up this year (above 3%)
   
   
3. GDP growth will slow to just above zero
   
   
4. GDP growth will go negative, and we'll enter a new recession.

My response: GDP will continue to grow at a modest pace (below 3%). I surprised myself a little with this response. While it's hard to be optimistic about the growth prospects for the next year or two, the bearish positions representing by options c) and d) struck me as too extreme. Europe will continue to be a drag but I think both the U.S. and Canada will experience modest growth this year.

Question 7 - Which statement best describes your view of the market?

1. The market hit bottom in March 2009 and we're in a new bull market
   
   
2. We're in a bear market rally and stocks will make new lows
   
   
3. We are in a volatile market that won't make big moves either way for a while

My response: We are in a volatile market that won't make big moves either way for a while. Any of the three options is feasible but I think a) has only about a 20% probability. I think b) is slightly more possible - say 30% probability - but c) most accurately reflects what we are likely to experience in 2012 and perhaps into 2013. It is possible to make money in markets like this but it requires careful securities selection and a willingness to take profits or cut losses as indicated.

Question 8 -Where do you expect the price of gold to be at the end of 2012?

1. Under $1,200
   
   
2. $1,201 to $1,500
   
   
3. $1,501 to $2,000
   
   
4. Over $2,000

My response: $1,501 to $2,000. No surprise here. I said in my first column of the year that I expect gold to re-test the US$1,900 level this year. I have seen no reason to change my mind.

Question 9 - What percentage of your portfolio is currently in cash and cash equivalents (e.g. certificates of deposit, short-term bonds)?

1. Less than 5%
   
   
2. 5% to 20%
   
   
3. 20% to 50%
   
   
4. More than 50%

My response: 20% to 50%. Normally, someone who responds as I did would be considered to be moderately bearish. However, that's not the whole story. For starters, my cash reserves are at the lower end of that range - between 20% and 25%. Second, I have to like to keep adequate cash on hand to cover the minimum withdrawal requirements from my RRIFs for the year. I don't want to be in the position of having to raise cash by selling securities at a time when markets are weak. If your response to this question is option a), I suggest you may be too aggressive in this uncertain environment. If you chose option d), you're at the other end of the spectrum - you may be overdoing safety and forfeiting better returns in the process.

Question 10 - What do you expect to happen in the 2012 presidential election?

1. President Obama will win re-election.
   
   
2. The Republican presidential candidate will defeat President Obama.

My response: President Obama will win re-election. Under normal circumstances, he wouldn't stand a chance. The high unemployment rate and the weak economy would be more than enough to make him a one-term president. But the Republican presidential field is so weak and the party so divided that an Obama win seems likely. If the Republicans choose Newt Gingrich as their candidate, the President will win handily. Although Mr. Gingrich is a great speaker - I have seen him entrance a room on two occasions - his sordid personal life and tempestuous personality will turn off mainstream American voters (yes, there are some left). Mitt Romney would give the President a tougher fight but his Corporate America persona would probably do him in.

So that's how I answered the questions. How did you do?