Market poised for big gains in 2012

• Reprints

Updated: February 18, 2012 4:48PM

Last week we talked about 2011 and how my expectations for the year ended up playing out. Despite hitting my call for the stock market almost right on the nose, the rest of the financial world was less cooperative.

Now we look at 2012, and though predictions for financial markets really are folly, they do form the foundation of investment strategy, and so folly or not, we all have to set expectations and make decisions from there.

The stock market exists now in a nearly perfect environment for gains. Interest rates remain near zero, corporate earnings levels are strong, and the U.S. economy should grow at a nominal clip this year (about 2.5 percent). Companies have learned how to make money in the post-financial collapse, lower-demand environment.

I believe that starting with the current earnings season, which looks to come in about average, the market should go moderately higher and move beyond some of the insane volatility experienced in 2011. I think this trend could continue all year, but will be tested in March when European issues start to form a larger blip on the radar. I call for the Dow to hit 13,100 by the end of the year.

I think the trend in large cap dividend-paying stocks is a little long in the tooth. That being said, I still want to hold these stocks because dividends will continue to be important, but I would also look to growth-oriented stocks in materials, health care, biotech, real estate, and for the really brave, maybe some bets on regional banks.

With the bond market, the smart money now believes interest rates will stay very low for about three more years. I agree, and looking at Japan, which has had super low rates for the better part of 20 years, I wonder if bank depositors will ever be rewarded again in the U.S.

I like intermediate term (5-10 years) higher-quality bonds. Because of some recent rule changes with preferred stocks, I think savvy investors could be nicely rewarded in those investments, as well. Keep your bond money at home in the U.S. for now.

On the international scene I think growth in China slows to a more reasonable pace and once the market realizes that the sky isn’t falling, other Asian economies could offer opportunity.   I’m just not brave enough for Europe but continue to like Canada.

It looks like we will get another round of quantitative easing (money printing) later this year. This should be OK for commodities, but prices in that space are ready for a breather. I think gold goes slightly higher, silver as well.

The wild card continues to be Europe, but later this year the U.S. debt debate resurfaces and with the presidential campaign in full swing nothing gets done and it could be ugly with further downgrades in the cards.

We should also be closely watching the Middle East. The rhetoric is very overheated. Military action with Iran would turn the energy markets upside down, putting financial volatility back on center stage.