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2012 Will Be a Very Good Year for the US Stock Market

January 02, 2012

2011 finally came to an end and we will be facing another year of great challenge and another year of excitement. US stock market experienced ups and downs throughout the year but ended flat. DJI made the best run, gained +5.52% for the year via +11.0% 2010 gain; S&P500 closed at 1,257.60 compared with 1,260.64 2010 finish, basically unchanged, via its +12.70% 2010 gain; NASDAQ lost -1.90% for the year via +16.50% 2010 gain.

US leads the world even it has made only a very small gain on average for 2011. Other countries are doing much worse:

Individual stocks as a whole performed much worse than the indexes showed. Among the stocks we tracked, 66% lost money in 2011 and only one third made money. The average is for a loss of -9.24% in 2011.

Now the question is 2012. Our view is that 2012 will be a very good year for the US stock market. Yes there is no question that world economy faces a lot of uncertainties or difficulties. European countries are entering recession, China's economy is slowing. But US economy will be in good shape this year and corporations as a whole will make more money this year than they made in 2011.

1. Corporation earnings will see 10% gain in 2012 compared with 2011. The following table gives S&P 500 2011 Q1 - Q3 earning result and Q4 2011 and 2012 earning estimates:

Q1- 22.56
Q2- 24.86
Q3- 25.31
Q4- 24.67(e)

2012 (e)
Q1 - 24.93
Q2 - 26.66
Q3 - 27.50
Q4 - 28.59

2010-Q4 - 2011-Q3 94.66 (PE = 13.27)
2011-Q1 - 2011-Q4 97.40
2011-Q2 - 2012-Q1 99.77
2011-Q3 - 2012-Q2 101.57
2011-Q4 - 2012-Q3 103.76
2012-Q1 - 2012-Q4 107.68 (PE =11.67)

From the table above we can see that S&P 500 companies in Q4, 2012 will expect to earn 28.59 or more than +15.88% they expect to earn in Q4 2011. 2012 yearly earnings for those 500 companies will expect to see +13.75% increase compared with the current trailing 12 months earnings of 94.66.

If the S&P 500 index can made the same percentage gain by the end of 2012 as their earnings do (+13.75%), we expect to see 1,429 points by then.

2. In addition, looking back at data reported by S&P since 1926, if S&P 500 closed flat in a year, its return in the following year is +26.34% on average. 2012 is an election year. This usually helps the stock market.

Of course anything could happen in stock market. The biggest risk for investors this year should come from european debt crisis.

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