The most recent was 2008, and if you don’t remember the global financial crisis that occurred that year, you were either too young, drunk or in jail. The one before that, 2004, ended with a 9% gain but was flat or down for three quarters of the span. And the one before that, 2000, featured the bursting of the technology bubble, with the Nasdaq 100 collapsing by 40%.
So it’s no wonder that I am looking at the coming election year, 2012, with a jaundiced eye.
My mostly skeptical outlook is not way out of consensus, but most surveys show that the majority of investors are either neutral or mildly bullish — expecting a rebound from the 2011 quagmire as the U.S. economy slowly recovers, the Europeans find a solution to their credit troubles and emerging markets fulfill their destiny as growth engines that can charge higher even if the West falters.
To find consistent success as an investor, it usually pays to have a variant perception. That is to say, a view that is outside consensus by at least a stone’s throw — which the consensus will eventually arrive at.
So in the current environment, it won’t work to be neutral or mildly bullish. You either need to be very positive, arguing that all the pessimism of late is completely misguided and that stocks will roar forward over the next year as the economy improves more than expected… Or you need to be very negative, arguing that the majority of investors do not yet recognize the world of hurt that lies ahead — and that stocks will be sold hard as earnings deteriorate.
My own view splits the difference a little. My research suggests that the majority of investors underestimate the trouble that lies ahead for Europe as it enters a deep and prolonged recession amid the deleveraging of its banks and governments. By the same token, the research suggests that emerging markets will get dragged down in the wake of Europe’s decline because they’re a key export market, suppliers of raw materials and depend on French and German banks for credit. And the research suggests that the U.S. won’t not be able to withstand the loss of buying power overseas, and that will drag down earnings of most companies.
At the same time, I think companies that depend most on government subsidies, such as alternative energy producers, will experience the most trouble as their fundamental business declines and their sugar daddies close their credit lines.
So, just to make it easy, the simplest trades next year will likely be short iShares Europe (NYSE:IEV), short iShares Emerging Markets (NYSE:EEM) and short solar energy equipment producers like First Solar (NASDAQ:FSLR).
What should investors be buying? You can pair these trades against a long purchase of iShares Consumer Staples (NYSE:XLP) components that tend to do fairly well, if not actually great, when times get tough. Other safe bets should be corporate bond funds such as Vanguard Corporate Bond (MUTF:VWESX) or the exchange-traded fund iShares Investment Grade Bonds (NYSE:LQD).
For one single long pick, I would go with a U.S. food maker or low-cost vendor. There are many good ones, like General Mills (NYSE:GIS), Kraft (NYSE:KFT) or Dollar Tree (NASDAQ:DLTR). But I’ll go with chocolate maker Hershey (NYSE:HSY), which makes a product that isn’t quite a staple but actually makes people feel better in difficult times. That Hershey product is, of course, chocolate.
Your first thought might be, “Hershey only makes chocolate, and I’d hardly consider that a staple that I must have.” Well, try explaining to my daughter that chocolate isn’t a household staple.
Hershey is the largest candymaker in North America, controlling 43% of all chocolate sales It also makes cookies, snack bars, baking ingredients and beverages.
Its product portfolio consists of over 80 brands, including Hershey’s, Reese’s, Kit Kat and Bubble Yum. Headquartered in Pennsylvania, it’s a $13 billion international powerhouse whose products are sold in 60 countries. It generates over $5 billion in annual revenues and employs 14,000 people.