DoubleLine Capital's stock market prediction for 2012 is cautious despite the current jolly mood of investors.
Through Feb. 21, the S&P 500 Index returned a healthy 8.32 percent.
DoubleLine Capital's monthly commentary for January 2012 attributed this bullish sentiment to strong global liquidity, continued loose monetary policy, favorable global PMI and U.S. unemployment data, expectations of a second round of LTRO at the end of January for the Eurozone (€500 billion to €1 trillion) and a lack of bad news coming out of Europe.
These favorable conditions, however, may not last through 2012; once they dissipate, the market rally may fade, too, according to DoubleLine Capital's prediction.
On the Eurozone debt crisis front, one concern is whether Greece and Eurozone authorities can negotiate a rescue package of sufficient size. If not, Greece could face a disorderly default as early as March 20, according to DoubleLine Capital.
Moreover, austerity and bank capital raising measures could take a toll on the Eurozone's economic growth.
In earlier webcasts, DoubleLine Capital CEO Jeffrey Gundlach laid out his own bearish thoughts.
For the U.S. economy, he was concerned about the still-high debt levels and unemployment rate. Moreover, the U.S. economy seems dependent on government stimulus, some of which are beginning to wind down. Below are a few alarming charts from one of Gundlach's webcasts.
On the markets side, he cautioned on the low volume and insider selling that has accompanied the rally so far.
Gundlach also noted that in the beginning of a calendar year, institutional investors have a tendency to put their money to work and buy risky assets. Moreover, U.S. financial assets may be benefiting from investors switching out of emerging market and European financial assets.
These trends, however, may not be strong enough to propel market gains for much longer.
Gundlach, therefore, sees the possibility of a market correction in the coming months of 2012.