Stock Market Rally

If I had to guess where we’ll be a year from now, in terms of the stock market, I’d probably go with the long-term averages and say that we’ll be about 8 to 10% percent higher than we are today. But aside from playing the averages, there are several other reasons why lots of professional investors see this rally continuing, and chief among them is earnings.

Despite the protests of the Occupy Wall Street movement, this country’s biggest businesses are lean, mean, profit machines that are pegged to deliver record earnings. And the more money they make, the cheaper they get, in terms of valuation. As it stands now, the P/E (price-to-earnings) ratio is, by historical standards, cheap. How cheap? A dollar of earnings today costs about 30% less than it has, on average, over the past 20 years.

Time to invest
While that puts a floor beneath the market as well as a carrot out in front of it, several strategists are expecting to see continued volatility in 2012. That can be viewed either as the cost of doing business or as an incentive to trade or to actively invest.

We also need to be mindful of the fact that, by March, this bull market will be three years old and will have gained, give or take, 100% since the lows of 2009. While that is above average on the percentage side, it is below average on the duration side, meaning it is perfectly plausible for stocks to rally for a fourth year, but you need to be aware that it is also getting late in the so-called cycle.

Economically speaking, from the president on down, we have been told to be patient and informed that rebuilding the economy will not happen overnight. At the same time, past election years have been tremendous for stocks, and it would be surprising if an unpopular president didn’t throw everything he had to boost the economy, jobs, and housing. That said, we are clearly in for a season of politicking and campaigning, and the forces of gridlock may break the normal chain of events. Of all the expected themes of 2012, none is more widely anticipated than the election. Perhaps the only beneficiaries will be media companies, which will likely sell unprecedented numbers of TV spots.

That said, strategists tell me that the big macroeconomic headwind story, which has gripped our collective consciousness for the better part of three years now, will be taken down a notch in 2012. Don’t expect to see boom times, but do expect to see gradual improvement, with no meaningful worsening of unemployment and home prices.

Matt Nesto has been been covering the global financial markets for nearly 20 years. Prior to joining Yahoo!, Nesto was a CNBC correspondent and served at Bloomberg Television as an anchor, reporter, and managing editor. He has also worked as a financial consultant and registered investment advisor.  A graduate of Emerson College, Nesto co-hosts the Breakout program with Jeff Macke.