Nervousness ahead of this week's German debt auction may have put pressure on European stock markets this morning, but there are four solid reasons to believe that Tuesday's strong start to the new year may be a signal of good things to come in 2012.
The U.S. Economy Is the Best of the Bunch
Conventional wisdom still frets over European economic woes spilling over to the U.S., but the statistics show otherwise. Based on the last few Institute for Supply Management (ISM) readings, the U.S. manufacturing industry appears to be staging a solid comeback. In addition, the Conference Board's Leading Economic Index (LEI) for the U.S. increased 0.5% in November to 118, following a 0.9% increase in October, and a 0.1% increase in September. November's increase in the LEI for the U.S. was widespread, suggesting that the risk of an economic downturn in the near term has receded considerably. In contrast, a range of similar measures in Europe shows that its economy is contracting, while China's rate of expansion is slowing. In relative terms, the U.S. economy may be the best of the global bunch.
Negative Consumer Sentiment Has Bottomed
Long-term contrarian sentiment indicators suggest a strong rebound in the U.S. market is already under way. The Conference Board's preliminary survey of consumer confidence came out on Oct. 26 at 39.8 (later revised to 40.9), posting one of the worst results in the survey's 40-plus year history. The last time U.S. consumers last felt this down was March 2009 – at precisely the market bottom. One year after reporting a survey reading at or below 50, the return on the S&P 500 was positive 100% of the time, rising by an average of 23%. This has happened 18 consecutive times, without exception. If this pattern repeats for a 19th consecutive time, my back-of-the-envelope calculation shows that the S&P 500 could hit 1540 by Halloween of 2012.
Recovery in 'Brand USA' Is Under Way
With Wall Street favorite Mitt Romney eking out a win in Iowa, the prospect of an electable, business-friendly president increases the prospects for a substantial improvement in "Brand USA" among global investors. This has nothing to do with which lever you or I pull in the ballot booth. There are plenty of people who don't have the right to vote in the U.S. but who are encouraged by the prospect of a change in leadership. I spent several hours yesterday with an official at one of the world's largest, and probably most active, sovereign wealth funds. He told me that his fund has been steadily shifting away from China and India to the U.S. Why? Because China and India are tough places to do business and actually make money. Meanwhile, cheap assets and a well-established "rule of law" make the U.S. an extremely attractive destination to invest money. A Romney presidency would only encourage this already growing trend.
The Mother of All Technical Indicators Turns Positive
If there is a self-fulfilling technical indicator, the 200-day moving average is it. After several false signals over the past few months, this mother of all long-term technical indicators has again penetrated this crucial level on the S&P 500. If the market holds this level, there is lot of money on the sidelines ready to enter the market. Fear can turn into greed among investors who are terrified of being on the sidelines when markets rally.