Author: Bill DeShurko, 401 Advisor
Covestor model: Dividend and Income Plus
There's a good reason why the term "liquidity" sometimes refers to money. Like a liquid, money will always flow to fill a void.
In 2012, there will be a lack of attractive voids where money can flow. The one big exception will be the U.S. Despite all of our troubles, to anyone sitting with a big pile of cash (particularly outside our borders), we have to look downright attractive. Picture yourself sitting almost anywhere in the world with a few hundred million to invest. Where would you put it?
China? China's facing a slowing economy - slowing to a pace we envy, but slowing nonetheless. Slowing means wage stagflation, unemployment and unrest. Remember one big advantage of our political system is that when we don't like our leaders, we have elections. In China, they have revolutions. I'd steer clear.
Emerging markets? Most emerging market economies revolve around commodities. Slowing global economies mean stagnant or falling commodity prices. No opportunity there.
Europe? Need anything be said?
The one global constant is that the printing presses will likely be running at full throttle to keep each economy afloat.
That leaves the world's largest economy, with a stable political system (true, it may not seem that stable by November!) and a stock market full of modestly priced stocks of companies chock full of cash on their balance sheets, with modestly growing net earnings to add further to their coffers.
Granted, economic data of late has been mixed, and earnings - while growing - have shown a slowdown in the rate of growth. The fear is that we move into a 2001-type situation, where economic growth and earnings remain positive, but the deceleration in both results in a falling stock market. The difference is that that in 2001 money could flow to the bond market, as investors anticipated a yield reversal (prices up) to reverse the slowing economy. That's not the case in our current bond market.
So where could global liquidity flow to in 2012? The one prediction I will make with as much certainty as I can muster is that last year's winners will not repeat their performance.
Utility stocks were the second best performing sector in 2011. The S&P 500's P/E ratio (a measure of relative value) was at 13.05 as of 12/20/11 and the utility sector was at 13.68 (Bespoke). In addition, the Utility sector is the only sector to have become more expensive in 2011 based on its P/E ratio.