With less than two weeks left before the end of the year, all kinds of market participants, from economists at multinational banks to stock bloggers in their bedrooms, have begun to give their predictions for 2012. Although most forecasts seem to fall on the pessimistic side, we'll leave the dreariness for Monday, and cap the week with some of the more positive scenarios investors have been told to expect next year.
Compiled for your reading pleasure, here is a lucky set of seven predictions that could benefit investors next year.
1. The Federal Reserve will engage in a third round of quantitative easing.
Among market makers, the view that the U.S. Federal Reserve will engage in a third round of quantitative easing soon, expanding the central bank's balance sheet by buying distressed assets without sterilizing the money supply, is essentially a given. The monetary easing, an action described as the last refuge of failed economic empires and banana republics in an infamous YouTube video, is so taken for granted, that certain assets have reportedly already priced in the action.
Although the latest comments from the Fed released on Tuesday dampened hopes for QE3, as the monetary action is colloquially known, several members of the Federal Open Market Committee that would make the decision spent November giving speeches indicating the measure was forthcoming. Moreover, the world's largest mutual fund has placed a $60 billion bet (25 percent of its assets under management) on quantitative easing happening sooner rather than later.
An announcement of further quantitative easing, amounting to hundreds of billions of dollars, would likely send U.S. equities up by more than 10 percent in a period of days, with commodities -- and precious metals such as gold -- climbing even more. Mere rumors have been enough to send the stock market surging by a couple of hundred points several times in the past few months.
The market, it seems, has gone beyond betting on whether Bernanke will turn on the dollar printing presses, and started setting odds on whether the cash will be distributed digitally or dumped from helicopters.
2. Germany will allow the European Central Bank to pool and monetize European debt.
By standing firmly on the tracks and coolly staring down the impending bullet train collision that a collapse of the Eurozone currency union would represent for her, German Chancellor Angela Merkel has solidified herself as the world's leading exponent of brinkmanship in politics. Merkel's actions prove she has the same nerves of steel and unflinching disposition as early cosmonauts, professional poker players, and Chinese anti-government activists.
But eventually, some are predicting, Merkel will blink, allowing the European Central Bank to flood the market with newly minted euros (which would decrease the cost of, or monetize, the sovereign debt of Eurozone nations) or, more likely, issue a Franco-German-backed bond to raise money for the currency union's ailing sovereigns.
The market is not treating that prediction as a foregone conclusion, buts odds are generally moving in that direction, even as Merkel and ECB President Mario Draghi keep saying it won't happen. The latest theory making the rounds of the financial world, as expressed Friday by Bank of America strategists in charge of currency trading, is that the leaders are just waiting until things get much worse, so as to be able to justify the drastic action to their constituencies.
Like monetary easing by the Fed, the euro printing spree will likely lead to a rally in equities and commodities.
3. Ben Bernanke will stand behind a U.S.-funded bailout of European bank assets.
This prediction is something of a long shot, given that Federal Reserve Chairman Bernanke has emphatically dismissed it in both private and public settings. In a world where sovereign leaders and central bankers seem to absolutely rule out the very solutions they adopt only a few weeks later, this possibility seems to at least deserve some mention.
Three factors come in here to suggest an American rescue of the European banks could happen.
First and foremost, such an action is likely to happen with QE3, at least to a certain scale. During the last round of easing, the Fed went on an asset-shopping spree that included some held by European institutions, and there is no reason to think the next round won't expand on this trend.
Second, the Fed could conceivably implement a quick bailout without having anyone notice. Although the organization's renowned secrecy has badly damaged its credibility during the past few years, it continues to operate behind closed doors, allowing it to do whatever its members see fit regardless of the eventual political blowback.
Finally, there's the fact there's political pressure outside the Fed, particularly from U.S. Treasury Secretary Tim Geithner, to help Europe.
With a presidential election on the horizon and the leading candidates for the Republican nomination calling for his head, it's not hard to see Bernanke trying to at least accommodate the president who appointed him to his most recent term at the Fed.
Obviously, and at least in the short term, what's good for the banks is good for investors.
4. Gold will go over $2,400 by midyear.
Following a recent correction that shook some of the most highly leveraged goldbugs out of the market, most analysts continue to be bullish on gold. However, their level of enthusiasm for the pricing prospects of the precious metal varies considerably, with the most conservative of estimates seeing gold peaking around $2,000 an ounce.
Citi's FX Technicals group recently took the top medal in the gold-bull Olympics, stating in a research report that it saw gold going over $2,400 per ounce in the second half of 2012 with a move towards $3,400 over the next 2 years or so. The research report coyly cited $6,000 per ounce as an eventual peak, although it hedged that assertion by stating the research team would prefer to take a more conservative stance.
With gold closing the week shy of $1,600, a climb like the one Citi anticipates could put returns of over 50 percent in the pockets of gold speculators by this time next year.
5. The S&P 500 will rise to 1,400 very, very soon.
Following the October rally in U.S. equities, many market analysts predicted the S&P 500, a benchmark index of American stocks, would reach between 1,350 and 1,400 points by the end of the year: Of the current chief strategists crunching the numbers at the six major American banks, only one, David Kostin of Goldman Sachs, predicted a number below 1,300. With less than 10 trading days left to go in the year, in a period that is traditionally marked for little market activity, the S&P 500 closed Friday at 1,219.66, meaning all the experts are likely to have overhyped expectations.
However, 1,400 sounds just about right to many analysts, who have simply moved their prediction from one that is bound to happen by the end of 2011 to one that will occur early in 2012. Such was the case, for example, with Ian Scott, a strategist for Nomura Securities, and Sam Stovall, chief investment strategist at Standard and Poor's.
Of course, the predictions are based on the hope of some type of quantitative easing emanating from the bowels of the Fed. As Gina Martin Adams, a senior analyst for Wells Fargo, recently put it, Our assumption is that stocks will suffer downward pressure until policy makers act decisively, but once the punchbowl is refilled, risk assets are likely to rally.
It seems the experts are just waiting for Uncle Ben to spike the punch before the party really starts.
6. The U.S. economy will improve more than expected.
Most economists currently predict the United States will experience moderate growth of about 2 percent next year. A Reuters survey of 53 economists recently found a median prediction of 2.1 percent.
Other economists, like Mark Zandi of Moody's, have been more optimistic, setting 2.6 percent as a possible target.
The most bullish of predictions in this regard suggest economic analysts have been systematically overstating the doom-and-gloom scenarios, and will be forced to revise expectations upwards, as many economists had to do with predictions for fourth-quarter growth.
Resilient growth in the United States would certainly be interesting, and lend more credence to newfangled theories of decoupling, the view there can be a long-term rally in both fixed-income and equity assets, that have been much maligned for most of this year.
7. Eastern Europe will bounce back.
As the little siblings of the big economies directly to their west, and still adapting their banking and economic systems following decades of communism, the countries of Eastern Europe have been battered by the carnage in European finance.
Now, some experts are suggesting they might came back with a vengeance in 2012. On Thursday, for example, large Italian bank UniCredit issued a forecast saying that, in spite of deteriorating conditions, Bulgaria is unlikely to fall into a double-dip recession. That's a more cheerful economic assessment than the one expressed by London businessmen on the state of the British economy.
Hungary, another Eastern European state that is in the middle of a banking crisis at the moment, is also likely to come back. The local currency has gained recently after the government started negotiating on a loan-repayment scheme introduced this year that delivered massive losses to foreign banks in the country. Some banks that had threatened to withdraw, leaving the country with a massive credit crunch, are now acting more diplomatically.