October 19, 2011 | In: General

Are Stocks a Good Investment for 2012

The year 2011 is almost over, and those who bought stocks (especially bank stocks) at the beginning of the year lost a lot of their investments. Stocks, with the exception of few (such as AAPL), were not a good investment for 2011, for many reasons that relate, in essence, to the economic crisis that is now spreading in Europe and that will probably touch China and the rest of the world in the next year or so (it’s a vicious, vicious cycle).

So now we know, for a fact, that 2011 was not the best year for investing in stocks. But what about next year (which is almost upon us), will stocks be a good investment in 2012?

Let’s examine some facts:

  • Stocks are currently undervalued: BAC is trading at less than $7 (it reached $5 a few weeks ago), C is trading at less than $30, RIG is trading at around $50… There are just so many opportunities for next year, and I’m sure in January of 2012 all these stocks will experience a very strong January Effect (imagine all the sells in December to claim for capital losses and all the buys in January for the same stocks).
  • World economies are getting worse: Greece was the first one to get hit, then Portugal, then Spain. Now Italy. Even France is threatened to lose its AAA rating. Debt problems are starting to emerge in China and other, smaller economies. World economies are definitely going in a not-so-good direction. This will have a huge effect on stocks (especially financial stocks) that will experience swings (there will be very high volatility). Most likely the majority of stocks will drop like crazy if the world economical situation becomes really bad.

  • Inflation: After a few years of deflation, inflation will start hitting hard. Inflation has already spread in China, India, and other developing countries that have a huge weight in the market. Inflation is already past the food prices barrier all over the world, which means that the next barrier is consumer products. What does this mean? This means that stocks will go up, just like everything else, to adjust for the new inflated prices.

  • Dollar versus other currencies: It seems that the dollar is now regaining its strength against all other major currencies, including the Euro (that may disappear in 2013). Traditionally, the strength of stocks is inversely proportional to that of the dollar, which means that, if the dollar continues to appreciate against other currencies, then stocks will go down.

  • Political instabilities: There are so many political instabilities all over the world. These political instabilities may grow bigger and may affect developed countries (they already are) either directly or indirectly. Such political instabilities can be bad news for most stocks, except maybe for stocks of companies profiting from these instabilities (HAL, anyone?).

  • Optimism: Investors are optimistic by nature, and a lot of them think that since 2011 was a very bad year, then 2012 must be a much better one. Optimism may lift the stock prices up.

Now after we examined the above facts, let’s try to answer the question, are stocks a good investment for 2012? Well, it depends, here’s what I think myself:

– Bank and insurance stocks should be avoided.
– Stocks relating to the strength of the Asian markets should be avoided.
– Resilient stocks such as Apple and Google should be purchased.
– ETFs can make a lot of money if played correctly, especially ETFs related to oil.
– IPOs should be avoided at all costs (especially the Facebook IPO).

I think 2012 will be a good year for stocks, well at least better than 2012, but, as I mentioned before, avoid bank stocks, focus on ETFs and resilient stocks, and you should be OK.

One last note: The days where you purchased a stock and forgot about it are long gone, you need to always track your portfolio, sell for profits and buy on opportunity whenever you can.

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