Buckle your seatbelts. That's the message analysts have for investors in 2012.
Although the S&P 500 is on pace to wrap up this year more or less flat, the stock market gyrated wildly over the last 12 months. The good news is that experts say we're likely to finish 2012 with stocks in positive territory. Getting there could be a bumpy ride.
"Flat years are very unusual and the history of the year after the flat years is actually very positive," said said Wayne Kaufman, chief market analyst for John Thomas Financial.
"I see the markets higher by about 10 percent in 2012," said Gary Harloff, owner of Harloff Capital Management.
Tim Speiss, chairman of the personal wealth advisor practice at EisnerAmper LLP, also predicted a positive 2012. "Let's say when we open for business on Tuesday, the Dow is at 12,200," he said. "I think you could see that climb up to something close to 13,000."
But this optimism for a modest increase is tempered by another shared sentiment: Getting there isn't necessarily going to be pretty.
In the near term, there's European sovereign debt to worry about, Speiss said. "The European Union financials are going to be the most troublesome areas for investors." Intervention by the European Central Bank is a good sign, he said, but they're playing catch-up trying to contain the mess. "They're in the midst right now of something they should have done a year ago," he said.
Speiss added that the market could turn negative at least temporarily if the Iranian regime follows through on its threat to disrupt oil shipments by closing the Strait of Hormuz. "[This] could be in the near term a significant issue" if investors lose confidence and if oil prices gyrate or spike higher, he said. "Most oil analysts are looking at oil prices around $105 to $110," Kaufman said. "If it goes much higher than that, it's not a great thing."
"I've been focusing on February of this coming year as being an important time," Kaufman said, because for the last three quarters, investors have snapped up stocks during earnings seasons. The next one happens in mid-January. But they tend to get buyer's remorse and dump the stocks shortly afterwards. Especially if companies lower their forecasts, Kaufman added, "Then you're going to see a pre-spring correction."
In the second half of the year, investors will have to steel themselves for what's virtually guaranteed to be an ugly battle for the White House and Congress. "I think that may take investors' eyes off of the stock market," Kaufman said.
"The administration will probably enjoy a decrease in unemployment rates, which from a political perspective could play to their advantage," Speiss said. He predicted the number of jobless Americans could drop from 8.6 percent as of November to as low as 8.3 percent by the summer — still high, but an improvement.
Gary Harloff also said improvements in employment should be evident in the third quarter as more companies become confident enough to start hiring. "It's starting, but it's not noticeable yet," he said.
If President Obama is voted out of office in November, though, Speiss said bank stocks could benefit. "If the Republicans are elected it could very well be that you'll see a more bank friendly environment," he said. If a new administration relaxes restrictions and capital requirements, "(t)hat could be very positive outcome for the financial services sector."
Kaufman said the election of a new president perceived to be more business-friendly than President Obama could boost investor optimism. If that happens, "I think you'll see an amazing fourth quarter rally," he said.
All of these factors will contribute the kind of volatility that marked this year's trading. One culprit is the proliferation of automated and high-frequency trading, Kaufman said. With machines rather than people responding to triggers in nanoseconds, even small movements can snowball rapidly.
Political and economic events also play a role, though, and 2012 will have more than its fair share. "I do think it's going to be a continuation of the type of volatility we've seen this year," Kaufman said. This year, there were 74 trading days during which 90 percent of stocks moved in the same direction, an all-time high. "It's like every few days we have one of these very lopsided days that used to be very rare occurrences," he said.