Prudentials market experts showed “optimism” for gains in the financial markets this year, but said some risks could weigh on investors earnings.
Calling it an “unusual uncertain time,” Ed Keon, managing director of Quantitative Management Associates, said Europe remains his top concern, noting that China, India and other economies and global hot spots could face major problems in 2012 that could disrupt U.S. markets. Turmoil in U.S. politics adds to the worries,” he said in a statement.
“A stronger-than-expected 2012 stock market is more likely than a very weak one, with U.S. economic data on employment, housing and manufacturing consistently better than expected for months now,” Keon said.
He said some of the strength may be the result of “temporary factors,” as well as a likely recession in Europe, weak U.S. income growth and ongoing concerns about household real estate are likely to constrain growth in 2012.
“But the financial obligations ratio is at a generational low, suggesting that on average—even though many families continue to struggle—folks are finding it easier to pay their bills now than they have in a generation,” Keon said.
“Household de-leveraging might be in the seventh or eighth inning, and the drag from this might be mostly over. And any improvement in Europe could lead to a major rally. So 2012 could look a lot better than 2011, provided the U.S. continues to heal and if—and it’s a big if—other trouble spots don’t bite us.”
Quincy Krosby, a Prudential market strategist, noted that despite the more positive domestic economic landscape, investors will be particularly sensitive to corporate top-line revenue growth and guidance.
“Slower European growth, coupled with a stronger U.S. dollar, will impede traction for U.S. markets, but a potential slowdown in hiring and continued weakness in the housing market will probably lead to more Federal Reserve intervention, providing positive stimulus for markets,” Krosby said. “Similarly, European Central Bank action will continue to provide liquidity—and confidence—for markets.”
For global markets, John Praveen, chief investment strategist for Prudential International Investments Advisers, agreed that Europe remains a significant concern, but that attractive valuations, low interest rates, further rate cuts and other liquidity measures, multiple expansion, and healthy earnings growth should help stock markets in 2012.
“Global financial markets and the global economy are likely to remain under the shadow of the continuing Eurozone debt crisis in 2012,” Praveen said. “Global equity markets are likely to struggle in a volatile 2012 but eke out modest gains. Further, U.S. and Emerging Market stocks are likely to outperform Europe and Japan.”
In the fixed income markets, Michael Lillard, chief investment officer of Prudential Fixed Income, said that despite the 2011 bull market in U.S. Treasuries, he believes there is still value, particularly corporate bonds, emerging markets debt and select structured products, and expects the credit sectors to dramatically outperform government debt in 2012.
“Fundamentals in the U.S. investment grade and high-yield bond corporate sectors remain healthy overall, and yield spreads over U.S. Treasuries are generous for this stage of the credit cycle,” Lillard said. “Emerging economies continue to offer value, supported by improving sovereign creditworthiness, productivity growth and investment flows. Volatility will likely remain high, however, due to bouts of risk aversion in response to the European crisis and a potential slowdown in global growth.”
Harry Dalessio, senior vice president for strategic relationships at Prudential Retirement, said the likely environment of slow growth, low inflation, low interest rates and volatile financial markets described by Prudential’s market experts will continue to challenge investors in their pursuit to reach their retirement goals.
“Although the worst recession in a generation is technically behind us, it likely doesn’t feel that way to many individuals,” Dalessio said. “Contributions to defined contribution retirement plans are lower than pre-recession levels, and the number of people taking withdrawals are near record highs. Therefore, 2012 is also likely to be a period where new approaches and solutions to help will be needed more than ever.”
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