2012 Economic & Market Outlook

“More of the Same – Living in the New Normal”

For those of you who do not like to watch reruns of television programs you may want to change the channel when it comes to viewing the U.S. economy in 2012. Similar to this past year, economic growth in 2012 will be below the 3% historical average and will likely represent only a small increase over 2011.  With unemployment and underemployment levels remaining stubbornly high, personal income growth will remain moderate and consumer spending will remain well below pre-recession levels. With consumer spending accounting for approximately 70% of U.S. GDP and with the rate of government spending being reduced at both the State and City level, it is difficult to make a case that economic growth in 2012 will turn out to be substantially higher than that of 2011.

Bill Gross of PIMCO fame coined the phrase “New Normal” to describe his prediction of an extended period of time where U.S. market returns would fall below historical averages while at the same time experiencing high levels of volatility.  This is certainly what stock investors have experienced in 2011.  A combination of election year politics, a dysfunctional Congress, continued concern over the financial crisis in Europe and slower economic growth in China will likely result in significant volatility in the stock market in 2012.

With interest rates at historically low levels the potential return for bonds is quite low and run the risk of being negative if there is any meaningful upward movement in rates due to global sovereign debt concerns.  With the dividend yield for the S&P 500 Index currently above that of the 10-year U.S. Treasury, we recommend investing in stocks with dividend yields superior to that of the index particularly focusing on companies with a track record of growing their dividend each and every year at a rate superior to the overall stock market. In this “new normal” era where stock returns are more moderate, dividends will account for a significant portion of stock returns. An additional benefit to owning stocks with superior dividend yields is that they historically have been less volatile than stocks that do not pay a dividend. During periods of high volatility dividend stocks have historically outperformed growth stocks as they have in 2011. Based on the current low interest rate environment dividend stocks offer a better yield than bonds and offer appreciation potential as well as the opportunity for income growth.

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