BOSTON (AP) — There’s plenty for investors to worry about heading into 2012, from the European debt crisis to our own struggles to regain fiscal fitness. The economic recovery is picking up, but not so much that it inspires great confidence.
But there also are reasons to be optimistic. Things that have historically driven stock market performance remain strong: record corporate earnings, lean balance sheets and low borrowing costs that help businesses to expand.
For David Joy of Ameriprise Financial Inc., the positives outweigh the negatives like Europe’s continuing debt and economic problems. He predicts stocks will rise around 15 percent, with the Standard & Poor’s 500 index reaching 1,425 points by the end of next year.
Joy is the chief market strategist of Ameriprise, a financial planning firm and mutual fund company that manages about $500 billion in assets. Among the positive factors he sees:
— Record profits: Wall Street analysts expect that earnings of S&P 500 companies will top the record 2011 results, and rise a further 10.3 percent, according to S&P.
— Record stashes of cash: S&P 500 companies have set a new record for cash reserves in every quarter for the last three years. Companies have about $1 trillion in cash.
— Low borrowing costs: Companies can still borrow at unusually low rates. That could help fuel business expansion, if confidence in the economy becomes strong enough that companies decide to reinvest the cash.
— Relatively cheap stocks prices: The S&P 500’s price-earnings ratio — a measure that shows investors how much they’re paying for a dollar in earnings — is low by historical standards. The P/E, based on analysts’ earnings projections for 2012, is 11.4 — below the median of about 18 since 1988.
If Joy is right about the market rising in 2012, it would offset the disappointment of this year. Stocks appear poised to end the year slightly lower after a 24 percent gain in 2009 and a 13 percent gain in 2010.
In a recent interview, Joy, based in Boston, discussed prospects heading into 2012. Here are excerpts:
Q: What’s the biggest factor leading you to expect a double-digit gain in the stock market next year?
A: Stocks are relatively inexpensive. Although stock prices have climbed since bottoming out in March 2009, they haven’t risen in tandem with the recovery in earnings. And prospects are good that earnings will remain strong, because corporate America remains lean after all the cost-cutting in recent years.
And the economy is likely to continue picking up. We’ll probably see growth of about 2.5 percent next year — not great, but better than the 1.6 percent we’re expecting this year.
Q: It’s clear that interest rates will remain low. What impact will that have?
A: The cost of debt financing for business will remain very attractive. If you want to borrow money to build a new plant, it’s cheap. It’s likely to stay cheap, because we don’t see inflation becoming a problem, with 8.6 percent unemployment likely to be with us for a while.
We’re also starting to see a more favorable outlook in some faster-growing foreign economies, including China and Brazil. Until recently, those countries were taking steps to head off inflation. But China’s inflation has recently eased, which could lead to lower interest rates. And Brazil recently cut rates to stimulate growth. It will take a while, but eventually, those changes should translate into faster economic growth.
Q: What’s keeping U.S. companies from spending more of their cash?
A: Corporations see lots of risks. They remember vividly that it became difficult to raise short-term financing during the financial crisis. They don’t want to be caught without being able to access cash a second time around.
Also, they’re cautious because they don’t know what the tax code will look like, given all the uncertainty in Congress, and with the upcoming presidential election. The absence of resolution in Washington has had a real chilling effect on economic decision making at the corporate level.
Q: Investors’ attitudes influence stock prices, regardless of how profitable companies are. Do you see that as a positive or a negative for stocks next year?
A: Investor sentiment is the real wild card. Investors are still very wary, and we’ll need to see better news about the debt crisis in Europe before investors can feel they’ve got some clarity. If they get better news, they might become convinced there are some bargains to be found in the market, and stocks will benefit.
Q: Europe’s on-again, off-again progress in tackling its debt problems continues to drive stock market volatility here. Do you see any resolution?
A: Europe will eventually play a smaller role in the U.S. market, but we should expect to see volatility continue in the first quarter, and maybe beyond. It won’t calm down until there’s some mechanism so that the European Central Bank can serve as a lender of last resort. Investors need to be convinced that there will be some firepower behind the European debt markets to, in essence, bail a country out if investors turn their backs on it, and a country’s debt financing costs become unmanageable.
Italy has a lot of debt coming due that it needs to roll over in the first half of next year. So we’ll see the crisis intensify in the first quarter. Countries like Greece and Italy face years of austerity, and Europe will be kind of a toothache for the market for a long time, perhaps years.