5 big questions for 2012

Updated: 11:54 p.m., Jan. 2

Sure, 2011 ended fairly well, with a strong rally in October and an OK rally in December. Sure, McDonald's ( MCD) gained 31%. Apple (AAPL) rose 25%. Humana (HUM) jumped 60%.

But let's face it: 2011 was a challenge. It was frustrating, even maddening.

Netflix (NFLX) hit $298.73 on July 13 but then dropped more than 75% by the end of the year. Bank of America (BAT) fell 59%. American Airlines parent AMR (AMR) sought bankruptcy protection and ended the year delisted from the New York Stock Exchange. Zynga (ZNGA) went public at $10 on Dec. 15 and hasn't closed that high since. Bank stocks, especially big-bank stocks, were a misery.

It's possible that 2012 could offer more of the same. Or that the market could tumble. Or, as Tom McClellan of the McClellan Market Report suggested, that the market could go "violently sideways," at least for the first half of the year.

In other words, a good year -- with the Standard & Poor's 500 Index ($INX) rising, say, 10% to 11% -- should be greeted next December with great celebration. Because the odds favor a challenging year at the least. But, if gains in Asia are any indication, U.S. markets could well open higher. Crude oil was trading above $100 a barrel.

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The Dow Jones industrials ($INDU) ended 2011 up 5.5% at 12,218. The S&P 500 was exactly flat at 1,258, and the Nasdaq Composite Index ($COMPX) finished down 1.5% at 2,605.

Some of the challenges will become apparent in the week ahead when financial markets reopen after the New Year's weekend and Iowa holds its presidential caucuses.

There are important economic reports, including the always-important monthly jobs report, due Friday. The market week begins Tuesday with December's report on manufacturing from the Institute for Supply Management and reports on factory orders and December auto sales on Wednesday.

On Thursday, many of the largest retailers will report December sales, the first time anyone will see if the holiday shopping season was a success or a bust. Weak reports will cast a pall on the markets. Watch Target (TGT), Costco Wholesale (COST), Nordstrom (JWN) and Macy's (M).

All that will help set up the big questions for investors in 2012. And may explain Tom McClellan's "violently sideways" market with big, shock moves that ultimately lead to a market that's little changed.

It's important to note, however, that he sees the violently sideways market lasting maybe into June and setting up a big second-half rally. He is an optimist as 2012 begins, and he's a rarity.

Can a U.S. recovery really take hold? Boy, that would be great for stocks. And the past few months have produced better data. Jobless claims have been falling; payroll employment has been moving higher. Auto sales have been rising. There have been teeny-tiny signs that the housing market may be coming to life, although prices remain pressured or are just starting to stabilize. That one reason why Home Depot (HD) shares jumped nearly 28% in the fourth quarter. A lot of big money is making a bet that the housing bottom is nearly at hand.

Will Europe prove too big a burden? Readers are tired of Europe. Everyone is tired of Europe. The fear, however, is that what purports to be a solution to Europe's debt crisis leads to something very bad happening. The most likely bad thing happening is a country leaving the eurozone and setting off a banking crisis. That's why the shares of so-called money-center banks such as JPMorgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) were crushed in 2011.

There is almost no way to avoid pain from Europe, with recession, already raging in Greece, hitting Italy, France, Spain and, probably, the United Kingdom. The Germans won't be able to avoid the pain. Business knows this. Nearly a fifth of the companies in the S&P 500 have already warned that fourth-quarter earnings will be lower than expected. Slowing revenue from Europe is believed to be a factor in many of the warnings. It certainly was the case with Oracle (ORCL), when it warned on Dec. 20. Only 27 companies in the index have boosted their forecasts.

Will China be able to slow its economy without crashing it? The Chinese are trying to steer around a gigantic real-estate bubble, something Americans know all too well. One signal that they may be succeeding: The price of copper rose 9% in the fourth quarter. That may reflect some optimism about the U.S. housing market as well. 

Can the world survive austerity? Europe is going into a major round of austerity, the price of German assistance in not letting the euro collapse. Republicans and Democrats have been fighting over budget cuts nonstop since the end of 2009, and that will be a big theme in 2012's elections. State and local governments have been cutting back sharply in recent years. Public-sector job losses have emerged as a drag on domestic economy. The worry about austerity is it will choke off consumer confidence well beyond the public sector and cause the economic recovery to stall out. Moreover, the worry is that the lack of economic prospects causes major social unrest. Looking for the canary in coal mine? Watch Greece and Italy.

Will the U.S. elections scare everyone too much? The stakes for all concerned are quite high, and it is quite possible that the intensity of the campaign rhetoric, the apocalyptic warnings that nonstop advertising will unleash will scare so many people that they stop spending. The budget battle last summer did dampen consumer spending.

What if commodities shoot up again? A big run-up in commodities, whether oil, gasoline, food or cotton, won't help anyone. In 2011, crude oil moved up nearly to $114 a barrel by the end of April and fell back as consumers stopped buying and held back on making new auto purchases. The fact is, most confident predictions of soaring oil and gasoline prices usually don't take into account that drivers will adjust. Crude oil is up 31% since early October. The next few months may test consumers' willingness to change their behavior.

There are some things one can't predict: earthquakes, flooding, bad weather, wars. All played significant roles in the volatility that wracked markets in 2011. The Iranian threat to blockade the Strait of Hormuz -- made several times in the last few weeks -- would probably send oil prices sharply higher.

The week ahead: All about the economy
You don't have to wonder much about earnings except on Thursday, when the key reports are from Family Dollar Stores (FDO) and seed producer Monsanto (MON). The former will offer a view of U.S. consumers. The latter will tell us a bit about what the global economy is willing to pay for a basic food component -- animal feed.

Then, you'll be left to ponder what fourth-quarter earnings will look like. The basic view is that earnings may disappoint.

Wall Street analysts are expecting an 8.5% gain in fourth-quarter profits. That's down from a consensus for 15% growth in October. The fourth-quarter earnings season will start after the close Jan. 9, when aluminum giant Alcoa (AA) reports results.

Markets for the week
			12/30/2011			12/23/2011			% chg.			YTD chg.
Dow Industrials			12,217.56			12,294.00			-0.62%			5.53%
S&P 500			1,257.60			1,265.33			-0.61%			0.00%
Nasdaq			2,605.15			2,618.64			-0.52%			-1.80%
Russell 2000			740.92			747.98			-0.94%			-5.45%
Crude oil			$98.83			$99.68			-0.85%			8.15%
(per barrel)
U.S. Dollar Index			80.52			80.24			0.36%			1.56%
10-yr. Treasury			1.87%			2.03%			-7.83%			-43.39%
Gold			$1,566.80			1,606.00			-2.44%			10.23%

Jobs report will climax a big week
The big report will come Friday with the December report on unemployment and nonfarm payrolls. The consensus estimates are for the unemployment rate to rise to 8.7% from 8.6% in November.

Nonfarm payrolls are expected to rise by about 150,000, after a bump up of 120,000 in November. That reflects strong reports on manufacturing during December. But don't expect any changes in wages.

Here are the big reports for the rest of the week:

Institute for Supply Management Manufacturing Index for December, due Tuesday from the Institute for Supply Management. Regional surveys suggest gains for manufacturing in the month. Indeed, the Chicago PMI report, released Thursday, suggested supply problems resulting from the Japanese earthquake are resolved.

Construction spending for December, due Tuesday from the Commerce Department. Look for no gain. Declines in public-sector spending will likely be offset by gains in commercial and residential building.

Release of minutesfrom Dec. 3 meeting of the Federal Reserve's Federal Open Market Committee, due Tuesday at 2 p.m. ET. The minutes should offer more color on the Fed's decision not to start another quantitative-easing program. With quantitative easing, the Fed buys Treasury securities to ensure there's enough cash in the economy. Many traders have been hoping for another round of easing; many economists loathe the idea, fearing the moves merely set the economy up for a big round of inflation.

Auto sales for December, due Wednesday from automakers. IHS Global Insight sees sales at a 13.8 million annualized rate, up from a 13.6 million-unit rate in November.

ISM nonmanufacturing index for December, due Thursday. Expect a small gain and a gain in its critical employment category.

Jobless claims for the week of Dec. 31. These are expected to remain below 400,000 for an eighth straight week and raise hopes that job creation is accelerating.