Wall Street strategists see U.S. stocks rising 12% next year, but most of the gains will come in the second half. Europe's response to its problems will call the tune. The outlook for the year ahead comes packaged with "if, then" caveats -- as in, if the European Union implodes, then stocks will fall, possibly by a lot.
The GDP growth forecasts are mostly about 1.5-2.5% in 2012 and about 2 % in 2013.
As all market forecasters know, surprises can overturn even the most elegant assumptions. And there is no lack of things that could surprise next year. Tensions could flare in the Middle East, which would affect oil prices, for instance. Perhaps the worst risk, says Putnam's Knight, is that European leaders "lose control and get a cascading banking crisis that hits the rest of the world."
Good surprises can happen, too. If Europe gets on firmer footing, a "catch up" trade could ensue as investors acknowledge this year's earnings growth and the possibility of a stronger economy next year. And if the U.S. housing market finally finds a bottom and becomes a net contributor to GDP, that would also be an enormous plus.
Finally, any rearrangement of the power players in Washington that "facilitates improved deficit and debt policy," as Barclays' Knapp puts it, would be encouraging for investors. But that, like so much else next year, would be a second-half event.
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