Of course a wise person will hedge his or her bets ...
In 2011 the U.S. economy took everything that nature and venal politicians could throw at it and still managed to grow overall. It could have been a banner year, but the tsunami in Japan, the politics of Washington, high oil prices due to Libya, the Euro crisis, and finally flooding in Thailand all took a toll.
I think the most likely scenario for the U.S. economy in 2012 is moderately strong growth. I don't think turmoil in Europe will hurt the profits of very many American companies; the worst effects will come from converting the Euro to dollars for multinationals, if they have substantial European sales and the dollar continues to strengthen. Keep in mind that the alarmist view of Europe may not pan out, in which case a rising Euro could have the opposite effect.
2011 was also the year in which almost every professional economist in the U.S. predicted a new recession, which did not happen, despite the best efforts of Congress. Where do they find these guys?
In fact, I would hazard that strong U.S. economic growth is now more likely than another recession, in 2012. Demand is out there: consumer demand for autos and housing, which are big economic drivers, is strong. Credit is a constraining factor, but there is still plenty of stimulus from the Fed and the deficit.
We are clearly in the virtuous cycle where demand leads to more employment and profits, which in turn creates more demand. It might even give bankers and other major capitalists enough confidence to invest in expansion. I'm not advocating going back to bubble days, but there is as much danger in being too cautious as there is in pretending there is no such thing as a risky investment or loan.
That should mean the stock market is heading up, but stocks are bought by by individuals, one decision at a time. Companies with the best track records for generating profits are already attracting investors. It is hard to find an overvalued stock today, although I could name a few. Undervalued stocks are plentiful, just pick a flavor, do thorough research, and avoid the wooden nickels.
Will the bond market fall? It should, but it won't as long as enough people are willing to accept almost no returns on their capital, as long as the capital is preserved and reasonably liquid. Once the bond market starts falling, if the economy is getting strong, watch out. Get out quick, while the getting is still good.
The gold bubble seems to have popped. I never liked gold as an asset (See The Gold Bubble [November 18, 2009]), but enough fools bidding on a Beanie Baby can make it seem valuable, until the auction fever dies. Gold has no intrinsic value. It just sits there, useless. Its price depends on the whims of jewelry consumers and irrational investors.
It would be helpful if the price of petroleum came down, but oil prices are geopolitical, for the most part set where the dictator of Saudi Arabia wants them set.
Inflation is dead in the U.S. for the moment, but high prices for agricultural commodities are giving some state economies a good boost. Wages will remain dead in the water until more unemployed workers are soaked up, so I don't intend to worry about inflation until 2013.
The main fly in the ointment is potential political suicide. Most investors know that the national deficit needs to be brought under control. The best way to do that is to freeze or even reduce federal expenditures, then allow for economic growth to increase tax revenues to the point the budget is balanced, and then start reducing the deficit. Counter-cyclical federal budgets were a major key to U.S. economic success ever since the Great Depression. Deficit spending during booms is as stupid as cutbacks during recessions. In no case does a train wreck in Washington help the situation.
Investors and the nation (and its government) need a long term outlook. It will take years to get to a balanced budget, and perhaps decades to significantly reduce the national debt. That takes planning and discipline. The Communist Party of China could accomplish that. Could we do it? Sure, we could. Will we? Only if long term, public-spirited investors insist on it.
Here's an outside opinion: the U.S. could become the driver of the global economy again in 2012, for the first time since 2006. We are still a big, rich, creative, and occasionally hard-working nation. Our natural direction is up.