Recently we have experienced a market of extremes.  In 2012, finding a middle ground, or Meeting in the Middle, is going to be key for growth in the markets and economy.  Consumer sentiment, business leaders, policymakers and geopolitics are going to have significant impact on the investment environment.  

We believe that: 

• Soft sentiment and hard data find middle ground.  We expect the US economy to grow about 2% , which is below the consensus forecast, while emerging markets post stronger growth and Europe experiences a mild recession.  U.S. gross domestic product (GDP) is likely to produce below-average growth of about 2% in 2012, supported by solid business spending and modest, but stable, consumer spending.
• Stock supported by converging outlook for earnings growth.  The U.S. stock market is likely to post an 8-12% gain, supported by mid-to-high single-digit earnings growth when the pessimistic outlook for profits reflected in the markets rising to converge with a slide in the lofty expectations for earnings protected by Wall Street analysts.  Stock may receive a boost from a slight improvement in valuation from the current 20 year low as confidence returns that the business cycle will continue. 
• Government and corporate bond yield gap narrows.  The performace gap between government and corporate bond reverses in 2012 with corporate bond outperforming as the post modest single-digit gains as interest rates rise and credit spreads narrow.  Bond yields may be volatile within a 1.7 – 3% range, but we expect them to rise over the course of the year, with the yield on the 10 year Treasury ending the year around 3%.  Ongoing economic growth will help to normalize interest rates as will a continuation of Federal Reserve policy, stable inflation and tightening fiscal policy. The wide gap between yields on government bonds and those of other borrowers is likely to converge some in 2012.
• Major policy-driven events will converge on the financial markets in 2012.  We believe a mil recession emerges in Europe, in contrast the consensus forecast for continued growth, and the debt dilemma continues to grab headlines and move markets, while the outlook for growth and financial stress in China will also garner attention from investors.  In Addition, the 2012 election in the US are likely to hold major consequences for investors.  They key fight this election is over those in the middle.  The party that emerges in control following the November 2012 elections will forge the decisions that will represent one of the biggest shifts in the federal budget policy since WWII.

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