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?
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