A lot of bears are sharpening their claws now that the market finally has had a reasonably sustained period of struggle. Some folks are hearkening back to the painful crash in mid-2011 that shook investors awake after what seemed like a pretty good run for the market.
So is 2012 set up to be like 2011? The short answer: Not a chance. Here’s why:
Stocks Still Strongly Ahead: For starters, consider that the Dow remains up about 5% so far this year, with the tech-heavy Nasdaq up over 15%. By March of last year, the major indices already had slumped back to square one after the early gains of 2011 evaporated. So thus far, we already have avoided the first major speed bump. Bears could argue we are about to head back to January levels soon … but unless that happens in a hurry, we already have significantly varied from 2011’s script.
Forget Charts — Read a History Book: And about that March 2011 contraction … do we really have such a short memory that we can forget the horrible earthquake and tsunami that devastated Japan last spring? The cost of tsunami damage topped $300 billion by many estimates, and shaved anywhere from 0.2 to 0.5 percentage points off Japan’s GDP. It wasn’t the charts or seasonal sentiment that hurt the market in early 2011, but ugly headlines. Same for debt ceiling brinksmanship that spanned July and early August of last year, culminating in a shocking S&P credit downgrade and a slide of about 17% in roughly a dozen trading days. If you think those events are guaranteed to transpire again in 2012, you have another thing coming.
Valuations Aren’t a Problem: The Dow Jones has an average P/E of 14.3, while the S&P is a slightly higher 16.4. That’s not screaming overbought, as some bears would have you believe, but comfortably in historic norms. Besides, some folks argue that the typical range isn’t around 16 but actually closer to 23 when adjusted for inflation. So don’t buy the nonsense about how stocks have outpaced their earnings. There are many reasons stocks could still suffer, or why investors could be reluctant to chase valuations much higher beyond these levels. But high P/E ratios should not be fueling concern for a crash right now.
Eurozone Shmeurozone: The eurozone economy shrank 0.3% in Q4, and by many estimates is already in the middle of recession. The International Monetary Fund has projected GDP to shrink by 0.5% over 2012. Sure, there are problems with sovereign debt and austerity is hurting many businesses there. But come on, are you trying to tell me that trouble in Europe is a new thing? The market already has priced in a recession — and many market-watchers have been talking about a Greek debt default as early as 2010. There certainly could be some unexpected trouble and worse pain to endure in the months ahead. But the current mess in Europe hasn’t been “news” for many, many months.
Bears Haven’t Won Yet: The EU headlines are just the most glaring example of the cliché regarding Wall Street climbing a “wall of worry.” And there’s no doubt the bears have had the negative narrative on their side for a long time with unemployment and housing and sovereign debt fears and a China slowdown. But it hasn’t caused the stock market to re-enter panic mode. This despite macro fears, low volume and other well-documented troubles. As Michael Gayed wrote recently, “at some point, the bears get tired.” Eventually, investors are going to realize that they have two choices: Keep wishing and hoping for the overdue crash, or realize that maybe things aren’t really as bad as they seem.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
