I am not in the doom-and-gloom camp. If anything, I have a fairly positive view of the U.S. economy and the stock market in 2012. I am looking for the S&P 500 to be trading above 1400 at this time next year, which translates to a 10%-plus gain from current levels. I expect modest earnings growth, driven by a U.S. economy that chugs along at a growth rate around 2%, while Europe avoids an implosion, and China manages a soft landing.
Having a positive view does not mean that we lose sight of the downside risks. In fact, a good appreciation of such risks should be an integral part of arriving at our outlooks.
From recession in the U.S. and/or China to the break-up of the Euro-zone, there are a number of scenarios that will have serious implications for the market. All of these and many others can’t be just brushed aside as symptoms of paranoia; they represent real risks.
As problematic and headline-grabbing as Europe has been lately, my worst-case scenario is about China. I don’t subscribe to the view that China is one giant bubble about to burst. The Chinese economy is slowing down and my concern is that the market may be too complacent in assuming that this no more than a modest deceleration from the 10%-plus pace of the last few years to something in the 7% to 8% range. A major Chinese slowdown, something bigger than consensus expectations, is my worst-case scenario, though I would put the odds of something like that happening at less than 20%.
What is your worst-case scenario in 2012? And what do you think at the odds of that happening?