In contrast, as we enter 2012, the optimistic economic and market consensus of a year ago has turned far more subdued. Reflecting more downbeat economic growth and investor expectations, individual investors (taking another $100 billion out of domestic equity funds) and hedge funds (now at their lowest net long exposure since the Generational Bottom in March 2009) have materially de-risked.Consensus rarely triumphs in the stock market, and I see 2012 as another year in which the consensus will be wrong.While I fully recognize the world is imperfect, the blemishes are now well known and, arguably, incorporated in current share prices. More importantly, three of our four concerns (high volatility, a mounting European debt crisis, a weakening domestic economy and the division between the Republican and Democratic parties) are moving in the right direction. And, the fourth, our divided leadership incapable of compromise, might now be coming closer to resolution with a country that appears to be leaning toward the Republican party (I am a Democrat). A close Romney win is now my baseline expectation, and such a political outcome would be more market-friendly than would occur with another four years under President Obama.I am particularly more optimistic that the U.S. economy's growth trajectory will exceed the expectations of only two or three months ago given the improvement in jobless claims, better-than-expected ISM and PMI readings, strength in automobile sales, etc. Concerns of a double-dip recession have vanished and the outlook for 2012 corporate profits has improved over the past 60 days.In Europe, political leaders and central bankers are slowly addressing their sovereign debt problems. Though tame and timid in approach at the outset, more "shock and awe" has been employed -- and more is likely on the way. It is my view that the eurozone affliction is moving toward a condition that can be tolerated by the markets (but must always be monitored).Another market-friendly condition is that central bankers around the world have signaled increasingly accommodative monetary policies. With inflation quiescent, low short-term interest rates are likely to remain for some time. With better economic growth ahead in the U.S. and the hope for some stability in Europe, a meaningful rotation out of bonds and into stocks is a growing possibility. As I have previously written, U.S. stocks have had an average P/E multiple of 15.3x over the past 50 years, while the yield on the 10- year U.S. note has averaged 6.67%. Today, U.S. stocks trade at only 12.5x with the yield on the 10- year U.S. note at around 2%. Moreover, historically U.S. stocks have been valued at 17x-18x when interest rates and inflation (and inflationary expectations) are around current levels.Risk premiums (the earnings yield less the risk-free cost of capital) are now elevated and back to levels last seen in 1974 as European sovereign debt issues have accentuated the flight to safety. It is important to note that following the last spike in risk premiums 37 years ago, the S&P 500 index returned +35% and +19% in 1975 and 1976, respectively.These low stock market valuations (mentioned above) will likely serve as a margin of safety for stocks. I also believe strongly that conditions have evolved over the near and intermediate term that have conspired to favor risk assets in the U.S. over many other areas of the world.
Here are 10 previously mentioned reasons for my optimism that a potential rotation into U.S. assets and out of non-U.S. assets might be forthcoming: